Surveillance: Fed Is Probably Already At Neutral, Darda Says

me on. They can and they probably will as long as those fed funds futures are still pricing in greater than a probability of a rate hike on Wednesday, and the last I saw on the Bloomberg terminal was about a two thirds probability in favor of hiking. But I think what's more important is the language in the directive on a go forward basis, So I think what financial markets are probably looking for is what some are calling a dubbish hike, meaning if they do raise rates in

additional twenty five basis points. Really to move to a totally neutral directive on the language, we sort of skipped the decision and get straight to the summary of economic projections. As a typical with these matings, Mike and we look at the dispersion and the dots where the Federal Reserve officials think rates will be in there's a huge spread. They're all over the place. Do we expect them to coalesce on a lower rate comparedsive weather median dot is

right now? I would certainly be shocked if the dot plot did not move down at least some because if we think about what the Fed was doing most of the year, they were basically setting markets up for what they were calling an overshoot of the neutral policy rate. And you know, the argument for that was due to quote unquote loose financial conditions. So clearly that's reversed with credit markets under strain and stock markets becoming much more volatile.

And the Fed was also concerned about growth running above trend. But we're starting to see some stoppening in the in the data. So the justification for continuing to move rates up and overshoot a neutral policy rate, I think is totally evaporated. So just based on that, we really should see some moderation in those dots. Michael Darda, is this just a monetary politics and demographics and where nominal GDP or the terminal rate should be butter stuff against politics

of more and more and more. I mean, are we trying to get the goals that we're goals of ten and twenty years ago that just shouldn't be goals now? Like five nominal GDP? Well, Tom, believe it or believe it or not, we actually do have um five and a half percent nominal GDP year over year. That yeah, the financial markets know that's not going to be sustainable, and the FED doesn't believe it's sustainable and wants it

to slow. And so you know, now the dilemma is, you know, do you look at the forward looking financial market indicators which are telling you nominal growth is going to slow? The FED has done its job. It's probably already at neutral. Uh. If it keeps going at risks going beyond neutral, and then you know, we have fears of a downturn or you know, is the FED just going to be wedded to backward looking information and that's

when you end up with a policy mistake. Add into that, you know, political pressure on the FED to stop tightening, and that makes their job more complicated. So that's that's an unfortunate element here. You know, we just saw Peter Navarro. You know, President Trump's trade advisor come out yesterday with his advice for the Fed. You know, he could do financial markets a big favor. Um perhaps looking perhaps looking

for a new career track. But barring that, zipping it on the fighting words from Mike Dada that m Petter Navarro is not allowed in colon for them to pause. Stan Drucker Miller legendary investor double lines Jeff Gunnlack calling for the same thing. Mike, here's an interesting question. We started the program by asking, you can the Fed hike rates when the market is in a mess? Let's sort of engineer re engineer this a little bit take away

the market. This economic data has come, i would say, exactly in line with what the Federal Reserve predicted at the last meeting and the meeting before the forecast for next year at two fifty for real GDP in two there and thereabouts for twenty I'm trying to understand how the Federal Reserve brings down their economic forecast when the data so far hasn't disappointed. It's come pretty much in line with what they expected. Right Well, there in lies

the rubs. You know, if you remember back to two thousand fourteen to two thousand sixteen, we had a situation where there was a lot of volatility and financial markets, and initially, initially the macro data was quite strong, and you know, the Fed ultimately did move to the sidelines after just one rate rise in December of two thousand and fifteen. Came under a lot of criticism for that, But if we look back at the data now, the financial markets were out in front of a very significant

economic slowdown. So if the FED wants to be forward looking, at has no choice but to look at the market. People don't like that, but that's too bad, Michael. You've written about this before in and every monetary person's mind is a failure of Japan. I don't know fifteen eighteen years ago, were they attempted to raise rates and they had to turn around and bring it back down. Does that actually play in the mind of fancy PhDs at the FED. Tom It should, because it's not just Japan.

It happened in Sweden. You know, they got rates up to around two percent and then they went negative because they triggered a downturn. The ECB totally blew it in twleven. So I think the FED is the Fed's timing has certainly been better. You know, they've been able to to move rates up in a state sustained way now for about two years, and in macroeconomic conditions have have remained pretty buoyant. So so far, so good. But you get to a point where it's time to back off and

you need to be forward looking, and that's where we are. Well. Arguably, Chairman Pound backed off a little bit. That was the perception of a lot of people at that speech here in New York, Mike. And what's interesting to me is that the rates market has already moved. So is the equity market waiting for confirmation from the Federal Reserve for what the rights market is already priceful. Is that what

we're saying got again to tomorrow? I think so. I mean, it's interesting that you know, the rates market is does seem to be way ahead. Here. We were well along the way to pricing out all the rate hikes for for next year. So it looks like the only thing left in financial markets in terms of rate hiking probabilities is you know, for another twenty five basis point rise this Wednesday, and then the Fed goes on pause unless

there's a big reversal. You know, we're focused on equity markets, but consider the fact that inflation expectations of dry pretty precipitously, credit spreads of widened on a year over year basis for three consecutive months. The FED has to take that into consideration. Mike Daughter was great to catch Helvity and John Fero to bring in our next steam guests. I brought up a two thousand eleven story from Bleacher Report, which is basically, are the New York Yankees like Manchester United?

Are the Manchester United's like New York Yankees? And of course you come down in two thousand and eleven to megastar players Jeter A Rod, Jason Gimbe. Jose can say you even know who the Yankees, Eric Cantona, Roy Keane, k E, A n E, a guy named Beckham, and a guy named Rooney, the world's chain two. The world has definitely changed. We have got to bring in on

a daylight today, on a morning like this morning. Jim O'Neil himself, the former chief of Goverman Sex Asset Management and the man who once engineered a takeover of Manchester United Football Club. Jim, good morning to you. Jose Marino is out, the manager has gone your thoughts good morning.

Can I just say that it was rumored that I was doing that rather than definitive, but so well to say, you know, as problematic as he has been as United manager, I don't think just changing the manager to whoever it might be is going to solve our basic dilemmas, which are substantial. Um, I'd recommend. I know I can get

it over that side of the pond. But for all your viewers, The Beat Sport had a fantastic program on last week about Too Good to Go Down, which was all about in nineteen seventy three seventy four Manchester Unity were relegated. It's five years after winning the European Cup and came straight back by the way, but it was one of my favorite periods of following United. So we have no divine right to permanent success. But it is this fantastic, wonderful sporting entity that is the hearts and

minds of everybody that loves the sports of football. George Best, Dennis Lawd too names You didn't mention cantonar con Chelsis and mentioned George Jim. I would have loved it if Tom had named some of those players that you just snacked. I mentioned George Best on TV, Jim Neil, Is this because of the Americans? Is this story these guys? These guys are not interested in Manchester United as the football team.

These guys are interested in Manches United as the grounds and what they now need to really take stock on that. If they are not very thorough in shifting the structure of the club and how they own it, they're going to damage not only the most important sporting thing I've ever been proud to be associated with permanently, but they will damage their own pockets. But hopefully this isn't the

only decision that's being made. That they're going to have a big rethink about how to actually preside over the world's greater sporting institution. So what needs to be done, Jim, what would you do? They need to they need to know to be honest sort of, you know, I think you guys might not recently became chair of Chassam House and put in the context all of that. They need

to discover. As many businesses do business business with purpose, Manchester United exists to thrill millions of human beings all over the world, not not just something that can generate advance in revenues. Jim, I'm a heck you you need to go away from this, Jim O'Neill. I look at it as an amateur and I see Manchester City going

at double speed. They just seem to play blindingly. Best if the NHO and hockey the same transition occurred to all the teams, including Menu, do they need to catch up with the speed of the game That seems to be the new game? So any any United fan would say right now. What makes it particularly annoying is that the two most exciting teams within the country are Liverpool and Manchester United, who are of course archodles, particularly Liverpool.

Uh And so you know we need to of course there needs to be a new culture the club from top to Boston needs to redefine and think about what is the purpose of Manchester United as a football institution and to get back to the romance, excitement of George Best and Eric Canton and all the rest of it. How do you do that with the new play years? Which young player out there before we go, Jim Monial, I know you have meetings this morning. Which young player

worldwide does Manchester United need to be? We have we have one of the French World Cup winners who, uh if if sort of guided and brought into the philosophy and focus, you would imagine would feature in most teams midfields. Uh.

You know, we have plenty of exciting talent. And you know United's history is all about actually every now and making sure homegrown youth comes through, you know, and amongst the many things that have been going wrong, United youth team is no longer that successful or important to the owners either. Well change, Jim, We've got to leave there. So Jim Monial, thank you so much to appreciate it. To catch up with him, of course for years with

Goldman Sex and that is an impassioned Jim O'Neil. I believe I've never heard of that impassioned over dollar Again, I imagine he hasn't been. It may be a three dog night, but it is a four tweet morning for the President of the United States. He's looking and I'm I'm just gonna paraphrases tweets because they're too long. I don't a waste of time to get to our valued guest,

the Mueller witch hunt. And then he goes on to speak of General Michael Flynn and then, as John Farrell mentioned the Wall Street Journal editorial, I hope the people over at the Federal read today's editorial. We still don't know what fifty pes means. I think it means billions. I'll go with John and that. And then just most recently, Facebook, Twitter and Google are so biased towards the Dems. It is ridiculous, et cetera. Terry hanges with us with evercres I s I who was forced to read each and

every tweet? Terry? Is there a permanence to this? After Trump? Are we going to see presidents with a more original communication strategy as we see with this president? Yes? I think so. Once you know, to louse analog reaching the fourth wall, once you've drouched the fourth wall, you pretty much can't go back. I imagine that will be the case.

You know. Peggy noon And made a very good point in the last Friday's the column in the Journal that, uh, the last two presidents have appealed to emotion rather than the strict policy parameters. And yeah, she's right about that. And then Twitter is one way to Is this a legislative system that will appeal to emotion? I mean there have been film figments of it, a little moments of it, I should say, I think a Sam Irvin during Watergate and others Howard Baker and you know, through through a

all of our history. But is this a legislative branch able to use emotion constructively in our our clear and present grid. Luck? Well, sometimes it does, you know, And I've I've been part of a number of those, uh the post nine eleven with the Patriot Act, uh post end Roun World, Tom with Sarbanes Oxley. I mean, emotion and urgency plays a role in UH, in in in congressional success, congressional action all the time. I would expect

that to continue regardless. I want to turn to something Terry you've led on, which is a constructive infrastructure debate. And folks, I mean this with no disrespect, but as I said, I think when I came back, it's always good to come back to the third world infrastructure of the United States of America. In this case, I was in London Heathrow Terminal five, you know, the fancy fancy and then Russels I got an oyster card, got it right here bringing that to the New York Subway with

you know, we were getting from the terry. Seriously was getting from the Green over and you know, to be honest, I'm so dumb. They had to escort me through the Westminster Subway. What line was I on? The the district? And I finally got an Oyster card because we were going back and forth. Now you can usual credit card, the contactless chip on the tap. In a point, why can't we do this? I mean, forget about why can't you bring Eurostar to America? Why can't we just have

a fifty ninth Street it's relatively smooth. Uh. There's a lot of reasons for that, and one of them is the state local uh emphasis generally speaking, you know, it was it took a long time, and it took a long time to build the interstate highways because there was an intrinsic bias towards uh, the state local projects, state and local money. That's the way things always worked. And

of course members of Congress represents states and localities. So uh, it's uh yeah, there's there's an old thing down here that if you want to start achieving something, don't don't begin by rearranging the deck chairs and the Titanic and the So what you're proposing essentially is let's completely overhaul the way the money is doled out. I mean that is a that is a recipe for quick. Yeah, I

am in folks, to be honest as Terry Haynes. Nos. You go back to the cn O Canal, the Chesapeake and Ohio Canal, I believe George Washington's time, and essentially, Terry, nothing's changed in our history. Right. Well, that's pretty much it. Yeah, I mean what you get is injections of federal money, but still state in local the state local money, you know, a match significantly contributed all the way from the CNO

and the National Road of the early undred. Yeah, the U s US forty today, does the new Congress have a constraint from CBO is the fiscal deficit and the dynamics of our growing debt in deficit? Are they actually going to be part of the dialogue in the two thousand nineteen oh? I think so. And I think that's one reason why I've suggested that a lot of policy debates, and I've always used infrastructure as one of the main examples,

end up in market sugar highs that really don't lead anywhere. Uh. What you have is the situation where Democrats want to want to spend a lot on infrastructure, but they want to roll back the tax the tax law in order to do it. Republicans won't stand for that either, will the President h Republicans might toy if they were given their heads. I think they wouldn't, but they would certainly toy with the idea of increasing the deficit marginally in

order to pay for infrastructure. And the Democrats have have been four square about not wanting that to happen. So what you've got is is gridlock on the hell not gridlock on the priority terry. The market can sort of stomach the idea of a shutdown. We're going to have the debt scene and debate in a big way anytime soon. Yes, but I think let me get to that in one second. The shutdown I want to emphasize is at at most I don't think it's very likely I have likely to

have today. But uh but even a shutdown would be a partial shutdown of only about federal funding. Now that is because the other sevent has already been decided upon, so uh so that this is gonna be not unimportant but but small. And number one number two on the debt dealing. Yes, but I think that the what you've seen over the last decade, certainly since near death experience, is a desire to want to make sure that their fiscal continuity, and part and parcel of that's going to

be raising the debt ceiling. Now asked you know, the the the old adages will still apply. The progressive left and the conservative right won't like it, but the vast majority of Congress will still be Republican and Democratic centrists, and they will still continue to want to be able to raise, suspend, deal with the debt ceiling in a way that doesn't cause any kind of serious problem. Terry Haynes,

thank you so much, greatly appreciate as signed. Just always in formative and joining us now Freya b. Mesh of Pantheon Macroeconomics, he's chief Asia economist, coming to us from the United Kingdom. Freyia, thank you so much for being here. I guess I'm trying to understand what people were exactly we're hoping he would announce, and how significant it is

that he really did not outline any new policies. I guess people might have been hoping that he would announce some stimulus in the context of the much weaker numbers that we've had coming out of China recently, and the kind of growing the move of consensus towards the recognition that grows is is not picking up or perhaps some some kind of reforms that could get people UM more

more excited on that side of things. But this speech was really always going to be about UM, the forty years of UM, of the opening up and and reform process, and really kind of extolling the virtues of that whole UM, that whole procedure and and and growth model. So it would have been a kind of an awkward time to

be releasing a whole of stimulus measures. I think in reality, the likelihood of those stimulus measures has increased quite substantially, and that's because UM liquidity conditions over the course of Q four UM have have sort of sputtered out again in the tetle have not not loosened as the PBOC would have have UM liked UM. They have been trying to loosen policy I think since Q two and taking quite a marginal approach UM, but it hasn't really UM.

It hasn't really worked so far. And the main reason for that is because households and firms are getting less confident about the the outlook for the economy UM and seemed to be transferring their money holdings into longer dated deposits, and that in China is very kind of UM banking centric economy is a very good indicator that growth really is going to be slow all the ways through the first half of next year and intercue three of of

of of next year as well. So the likelihood that the p BOC is going to be able to continue with this marginal approach all through that long period of time UM is quite slim, I think. So we're really kind of tipping towards the People's Bank of China enacting a rate cut here. Could you speak to the connection if they're indeed is one between the restructuring of the shadow banking system in China and the companies that are most affected by that restructuring, and I'm thinking of small

and mid sized companies specifically. Yeah, this is this is a major problem that they have, that that they have actually admitted now that they hadn't really anticipated just the extent to which their de risking program and the crackdown on shadow banking was going to impinge upon the funding of the types of funds that you've just been referring to, the small medium sized private arms UM in In Q three, there was the added kind of UM, the added to

drag for those companies that UM the local government local government was just was just crowding out all of the bond issuance UM and and making it very difficult for

corporations even to get funding through through the bond market. UM. In Q four that's loosened up a bit, so we're starting to see a bit more kind of loutioning for UM for credit conditions, UM for the for in the bond market, and also actually in terms of conventional bank borrowing, but not on the on the shadow banking side of things on which so many of these companies are are dependent.

And the main problem that they're facing in terms of UM of GDP growth turning around is that that there has yet been a kind of modest UM improvement in

credit conditions, but that hasn't translated into liquidity conditions. Because of what I was mentioning about UM, firms being very kind of UM trepidationous about the the the outlook UM and not really wanting to spend, so they've been moving their liquidity holdings into into the longer dated deposits, and that really tells us that they just aren't aren't willing to suspend at the moment for for obvious reasons, that the growth is slowing, that there's an uncertain trade outlook, um,

and just that the the environment for for for capital expenditure is not great at this stage. And at the same at the same time, the labor market is deteriorating, and therefore, um, the household sector is is feeling that kind of pinch, and it looks like they're looking to raising their savings rates as well in anticipation of of

that further deterioration. Well, let me just offer one other data point and then I'd like your thoughts on the implications for global commodity markets, specifically for oil markets, because automobile sales in China have basically declined, I mean, inventories jumped, but if you look at the actual sales numbers, it's

like the first year down in something like a quarter century. Yeah, it's possible some of that data is is somewhat distorted because of sampling issues on on the retail sales side of things, that they only include firms that are above a certain threshold in terms of their annual revenues. So

some of that might be somewhat distorted. But if there are firms that are dropping out of the sample, then that tells you that at least some portion of firms, and particularly the smaller firms, going back to our earlier conversation UM, are struggling and they are seeing revenues falling UM, and that tells us that there are there is a big problem in retail sales in general, and and in autos as you've highlighted as a particular UM area of difficulty,

which which you know, these are big ticket items, and

the labor market is deteriorating. It makes sense for for households, particularly in the context of the kind of the negative wealth effects that they've had this year through the decline and equities in in the equities market UM, it makes sense for households to be thinking twice about these UM, these these purchases about the other thing that we can note on this side, on the on the supply side, is that there is this very strong shift towards the

UM the kind of the new energy vehicles You've mentioned oil, but there is a shift towards the new energy vehicles and the potential for um eventually for this to become an excessive supply. In the same way that we've seen Chinese excess savings being channeled into into solar power previously and that helped to kind of bring about a decline in in um in in the price of affordable take cells, we could see something similar happening in on for a

new energy vehicles. So if you happen to run a business that depends on exports of commodities to China, and I'm thinking of people specifically, let's say in Australia, what should you take away from the recent economic news about China. Well, it's there's there's two sides of this. I'm not going to give you on the one hand, on the other hand, thing that's two economisty. But the thing is that when commodity prices are are tanking, that's not great for Chinese

firms either. And a lot of the firms that are very over indebted UM, they they are you know, feeling the pinch and of those of the of the commodity price declines that we've seen so far UM and the the incentive now for the Chinese government is to get in there and curtail production and try to support UM, try to support prices in that sense in order to

help these companies continue. There there many multi year UM de leveraging process, so there is at least that UM flow from from the Chinese side on the supply side UM.

But more broadly, Chinese demand growth is is definitely slowing, and as they said that, the leading indicators point to slow down well into into next year, into the later part of of next year, and particularly if we're talking about hard commodities, we've got UM, the property markets showing signs of of of fatigue with sales slowing, and and the how sort of sector more broadly facing facing difficulties there UM. So it's not a great outlook on the

demand side for for for commodities. And I haven't even asked you about US China trade relations, so now I'm

asking what is your outlook? Well in the okay, in the longer term sense, then then I still see these two economies on a collision party here, and that's because I think China is going to have difficulty in transitioning to private consumption lead growth and the flip side of that means that they're going to continue to have excess savings and those are going to have to be channeled somewhere.

They have and they have until now been channeled into the commodities, the old guard UM sectors and the kind of the polluting sectors where it's no longer possible for for China to continue pumping pumping up the debt and also to continue UM degrading the environment from a political standpoint. So the only outlet for those savings now is in the move up the value added chain and the so

called made in China UM trying five. So that puts China on this collision path with with the US because it moves them into that kind of higher value added UM output. The Mr Trump is so worried about UM in the short term, we do think that Mr Trump actually has been weakened by the by the result of the mid term elections that if you're a Republican looking towards then we've got to take no longer. We've got to take your short term answer because we've got to run.

I want to thank you very much, Afraid of Beamish Pantheon Macro Economics, a chief Asia economist, Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Ray yea