Surveillance: Fed Must Speak, Lyngen Says

Two's out the thirties. As you looked at things yesterday, what was the challenge to the Fed? Yeah, it was definitely the belly. UM. The auction, like both you and Lesa mentioned, was absolutely awful. UM. It really showed that UM, the expectation that buyers might come out because you'll te backed up so much loomed up being incorrect. So UM. I do think that there is a supply and demand

UM issue. I think after all of the debt sales that we've seen over the course of the last year, UM and expectations for continued tail going into this year, which potentially get bigger UM is something that the FED is going to eventually need to address as part of UM its credibility, if you will, in keeping yields within

kind of low framework while the economy reopens. Marven build on that for us the FEDS responsible potential response to this, how inconsistent the price action of the last week has been with the fetch new framework, the very fact that real yields have searched higher. Great height expectations are being brought in, but inflation expectations have basically done very little over the last week. Yeah, it's absolutely a change in

UM commentary. I believe UM. There's no doubt that we we for the most part, have UM given into the FED being able to get close to its inflation target. That was the first part of the move that took us from January and to the beginning of February, and all is good. UM risk assets felt good that we were reflating the economy and everything was within the FED framework.

After that, however, the market started to push against UM the FED ability ultimately to hold the line, and we moved in from I think it was probably late three just two weeks ago, to at one point, based on your dollar futures at least UM pricing in a late two numbers, so you know, within a week within a week,

week and a half, that's an aggressive move. UM. At this point, I think this morning we're still early three, but you know, certainly the market is pushing the FED as to whether or not it's going to be able to hold the line in UM in the vein of all of the stimulus sets coming along. Marvin, how much are we trying to create a narrative to fit a technical move? Yeah, I think I think that's certainly a risk to UM. There were there were these massive price

caps yesterday. UM. I think that there's a lot going on behind the scenes, you know, whether it's convexity hedging, whether it's UM kind of these potential changes to SLR ruled and bank holding the treasuries. UM. I think all of that came into play yesterday. And you know, ironically, a lot of those type of technical factors come in at the worst time. So it was to certain to be fuel to a fire that was already that was

already burning. Is there a larger point, though, to take away from the technical move if this was technically driven, that this market the biggest, most deep bond market in the world, setting key interest rates that affect for an exchange rates that infect borrowing costs for companies and individuals, that it is fragile, and then it's getting increasingly fragile as you have an increasing number of crowded and leverage traits. Yeah, the most important number in the entire world is what

that tenure yield is. So absolutely, and we learned how important was last year when we're in the midst of the volatility and we had a similar disconnect on the liquidity side of things and how much firepower that SHED needed to use just to pull that part of the market in. Um it is. It is scary to think, particularly given all the liquidity that the FED has pumped into it, that we still wind find ourselves in this situation.

Um So, yes, expect expect that choppiness because there there are structural issues at a time when we've got, you know, more and more treasury security is being put into the

into the world that need to be absorbed. Mom And I think it's too early to say with conviction that the FETs credibility is being tested, but least I think we can start to say that in Europe, in Australia that that's been the story of the last twenty four hours Australia pushing back, coming in and buying three billion dollars of Australian bonds at the front end, trying to cap the story at the front end because they have yield curve control there and they're struggling to control at

least on top of that the ECB an executive board member out this morning once again pushing back against this move. We've seen what it raises. A question which you talked about yesterday, which is a good one. At what point is j Powell banker to the world. At what point is the volatility around the world that they're experiencing, the fact that they've got a more simular sance their economies because of what he says, going to affect his message, and so far people are saying he still is very

much beggar to the United States. His message statement of confidence, Marvin statement of confidence. We've heard from them all through the week, Chairman Paler, Vice Check Calorada. Raphael Bostick of the Atlantic Atlanta Fed President said the following race still very low from a historic perspective. I'm not expecting that we will need to respond at this point. That was in the middle of this mess. What are you expecting to change on the communication side, you know what, they

put themselves in a in a difficult position, no doubt. UM. In a lot of ways, their commentary is a glide path for traders to continue to try to push yields higher. And I think that's going to happen. Um. You know, certainly, while we saw volatility come up for the first time this year because of yield um, it didn't necessarily bleed into all different parts of the market. Credits still is holding in fairly well, you know, high yield deals are

still are still getting done. I think that gives the bed cover for for a little bit of broader financial conditions are still you know, at the loosest that you know, near the loosest that we've seen since um, since the last spring. Once we start seeing that creep up UM and more volatile days, well let's hope we don't have all the days like yesterday, but but the voltilla that we've seen over the last couple of weeks, if that continues,

those financial conditions will start to tighten. And um, you know, one one part of the real economy that has been affected by this mortgage rates and and and for me, at this point, mortgage rates and credit spreads are almost as important, if not more important, then where the equity market is for the FED because it affects companies and it affects the real economy. Mom and great points A

great to catch ups? What a twenty four hours martin low that state straight seeing a global markets strategists and then joining us now being our capital markets head of US race strategy and great to catch ups. Let's talk about it past duration timing running through it the bond market. The last DAO sugged well, we've seen a very significant sell off in treasuries and it's the type of repricing that has historically been linked with a shifted monetary policy.

The FED needs to say something and whether it's simply job owning comparable to what the ECB has done, or if there is some action to be taken. The market is waiting to hear, and there aren't any scheduled FED speakers immediately on the horizon, but that doesn't mean that we might not hear something by the the in the today, if not into next week. And so we're worried about is the FED comfortable with the paste the backup in rates and as you pointed out earlier. It really comes

down to real rates. Ten year tips will yield much higher at this point in the cycle than I think that the third would want them to be. So here's the Fed speak next week. I went through this a little bit earlier. I'll do it again. Williams coming up on Monday, alongside Bostex, Massa Kashkari later in the week, Brainard Daily, then Harker Evans and then chair Pal closing

out things on Thursday, just before pay rolls Friday. How do you think the script is going to change for Chairman Paullion, given that we've heard from him literally a couple of days ago as this bond market move was developing. Well, if he doesn't change the mantra from we're comfortable with us backup in nominal rates to we're monitoring and watching what's going on in real rates, then the move is going to extend because the market will take that as

a signal that they can push this trade. And keep in mind, the one trade was cheaper and steeper, and so if we get the endorsement from policy makers to let it run, I don't see what will stop ten year yields from taking another shot in nominal space at one sixty maybe up to the biggest limiting factor is

going to be the response in equities. If we see additional wobbles in the equity market comparable to what we've already started to see, that's going to be the feedback loop into tighter financial conditions that ultimately gets the market concerned that the FET will need to do something. I've been amazed, frankly at Powell's uh large indifference toward this back up so far. Let's just be clear. I mean, yes, we've got a little bit of a sell off, but

stocks were near record highs or at record highs. We've seen an incredible run. I mean, at a certain point, how much is this apparent having a very bad job controlling a toddler in the sense that, yes, you see rates normalizing gas you might not lose as much money on the real rate basis if you go into bonds, but it doesn't seem like it's actually causing a disruption and risk acids. I mean, it isn't a bit premature for the Fed to come out now. I would say

that we would. The Fed has done a very good job of getting in front of potential shifts in sentiment, and that's the risk. The risk is you're right, it's not a ten percent correction in stocks. It's not correction in stocks. But if the said waits until the smp it is off of the highs, they're going to have a much harder job to do in getting the sentiment back into risk ass So Ian, what does this mean

about the Fed's balance sheet? I mean, if it's at seven point six trillion dollars and they have to come in with at least job owning, if not actual bond buying, if there is any wobble whatsoever in markets that seem increasingly fragile, does that mean that the FED is going to keep a balance sheet that's at seven point six

trillion dollars or much more for the foreseeable future. Because they now are a controlling agent in a more ongoing way, I think it's safe to say that the Fed's balance sheet is going to continue to expand keep in mind that they're actively buying one and twenty billion dollars in bonds between treasuries and mortgages every month and that's expected to continue into the end of the year before tapering, and tapering will take somewhere between six and nine months,

let's call. And then that gets us in a position where the FED will have a very large balance sheet, but they will continue to run it like that. Recall before the pandemic, when the FED tried to normalize its balance sheet, we saw reserve scarcity that stopped that process. So I think it's very safe to say the third is going to have a large balance sheet for the foreseeable future. And I think the question you're raising is

a really important one. It's not about waiting for a repeat of December, and it's about providing the adequate guidance to how people understand what the reaction function is now on rates. I think they've done that on the asset purchase program, I really don't think they have. And earlier this week when they say things like it's a statement of confidence, yes it is higher real yields is a

statement of confidence in the forward outlook. But if you're a central bank right now, you can also just add on the line really simply will be vigilant about what happened to the long end in case at least to undue tightening of financial conditions and feeds back into the economy and that's not an expensive line to fit in, is it. No, it certainly isn't, and I don't think that it is one that would materially shift the monetary

policy stands. It will simply be an acknowledgement of what has gone on in terms of the price action and its potential ramifications. It great to catch up Inn and the Female Capital Market's head of US rate strategy. We need to get this economy reopen, and we need to get Lesa's kids back to school. It's a big, big issue for parents across the nation. Joining us now, I'm pleased to say, is Congresswoman Ashley Hinston, Republican from Iowa. And actually, I know you used to be a news anchor,

so well, I don't play any tricks. I'll play straight down the middle and keep the question. Sure, Actually, how do we get this country and the kids of this country back to school? Well, Jonathan and Lisa, thank you so much for having me, and good morning. It is

essential for kids to get back to school. My kids back in Iowa are about to get up, get ready to eat some breakfast, and get on the school bus today because our schools in Iowa are open and I has led the way on this, but unfortunately, about a third of students across the country are still only learning from behind screens. So we can get them back to school. The science shows that kids can be back to school safely. Um. So we need to do that with billion dollars in

money that's already been appropriated to go to get schools reopen. Um. So that's why I filed the Reopen Schools Act. We need some accountability on this money to ensure that our our teachers get back in the classroom and they get back safely, and that our kids get back um. They're falling behind. There are mental health challenges that are just growing immensely. The number of emergency room visits for our young people um are increasing um and that's troubling to

me as a mom. So we have to get these schools reopen, and we can do it with the money that's already been appropriated and spent um. And we we just need to make sure that there's some accountability there so we do get these kids back in the classroom. I sent from you, it's not a resource issue. What do you think is held in this back? Well, unfortunately, I think politics have been getting in the way here.

And our kids shouldn't be a political football and keep if we keep moving the goalposts here, we keep pushing back what that that end result is one day in a classroom, Um, is not enough for our kids. And it's not as easy as just walking down the stairs and logging onto a computer for so many families, Um, I'm hearing from so many people. You know, they had to go to sit in the libraries parking lot to access the WiFi to be able to complete their work.

That's a reality for so many ways, and it's not easy to do. And so unfortunately, I think politics has gotten in the way. Democrats have actually blocked my bill three times already. So, UM, this shouldn't be a partisan issue. Of getting our kids back to class shouldn't be a partisan issue. We need to be getting our next generation UM back where they belong, learning with a teacher in

a classroom. So are you willing to put your weight behind the one point nine trillion dollars stimulus given the fact that within that is a good chunk of cash in order to get kids back to school. Because President Biden agrees with you, he says this is crucial. We just need to put the funding behind it well, Unfortunately, as the bill stands right now, I don't plan to

support it. Um. There's an additional hundred thirty billion dollars that is set to go to schools, but only five percent of that is said to be spent this year, which to me means that that's not really about getting kids back in the classroom. UM. In fact, about nine percent of the bill is designed as that targeted COVID relief, but only nine percent is designed to get more vaccinations, shots and arms. UM. The accountability there for contact tracing

and testing. So when you look at everything else in this bill, only that is what's dedicated and that small amount of education funding that's set to be spent this year, UM, it's a signal to me that that's not really the priority here. And so so that's why I'm trying to make sure that there is accountability here. We're talking about a trillion dollars that's still left from that last package that was passed at the end of December before I

was even in office, that hasn't been spent yet. UM. So when I look at that, we have to stand up for taxpayers and we need to make sure that the people who are getting this money, are following through on what the intent was, which was to be used

to open schools and do it safely. Congress Women, A lot of people come on this show economists and they talk about how we can already see the money going into the economy directly that was passed back in December, that the aid that has been provided dear to date, are going back to to last year helped revive the economy and turbocharge the recovery. That will allow more people to get back to work. Given that more money, economists say will help the economy move at a faster pace

and get to a good speed quicker. What's the reluctance to go ahead with this? I mean, is it bigger debt loads? It's very unclear to a lot of people. Yeah. Well, I think there's a few elements in this package that to me are the poison pill, one of them being the fifteen dollar minimum wage mandate. Uh, you know that's still in the House version that's going to be passing through, and so to me, that's very clear that that's a priority.

It shouldn't be in this bill. We should be having conversations about that in a separate entity, but or a stuff an environment. But again, this this whole process wasn't It wasn't how process should move. It didn't make it through. We didn't we didn't get the chance in our budget committee to offer amendments, um, to try to make this bill better. Um, you talk about three fifty billion dollars bailouts to blue states. Uh. The Congressional Office that it

was supposed to be thirty five billion. That's what's actually needed. So to me, it's just this, it's an overspending, it's a spending package. It's not a targeted COVID really filled. Congresswoman, you've had experience with infrastructure spending in your home state. Given that this bill is likely to be passed, would you support an infrastructure bill in addition to the current fiscal support fiscal stimulus has been passed. Well, I hope we do get to work on an infrastructure package. And um,

that is something that's passion of mine back home. I understand infrastructure is economic development and in the true Iowa fashion U the great Iowa line, if you build it, they will come. Um. We know that in Iowa, infrastructure is a crucial part of our economy. We're an agg state and we're a manufacturing state. We need to get those products to market, and we need to have the infrastructure to do it. Um. I think infrastructure though also

not just your roads and bridges, but broadband. We've seen be such an important issue in the last year. So that's something that I'm very passionate about and I want to work on for Iowa, and so I'm hopeful we get to consider an infrastructure package. But unfortunately this package one point nine trillion dollars UM. It's not targeted cover relief, which is what we should be considering here. Actually wonderful to catch up. Please sty Close come back soon. We'd

love to tell more. Congresswoman actually hints in the Republican from Iowa, there's a question of what the world will look like once COVID ends, once the pandemic subsides, and not just the future of vacation, which we're all planning hopefully in sometime in the near term if we can, but also for work. And this is something in a subject of a high controversy. Susan Lund has been studying

it at McKinsey. She's a Global Institute partner there, and they're putting out a series of reports on the future of work and how it will transform how the COVID pandemic has accelerated some of the technological changes that really we're already underway. Susan, Can you just talk about one of the largest findings from your latest report in terms of fundamental changes that you're already seeing take hold and

what that means for the future of work? Hi, Well, what we found is that some of the changes in consumer and business behavior that we're forced on us in the pandemic are going to stick. And the impact of this and the workforce is that we may see a lot of jobs that weren't really affected by technology and other trends, like those in food service and retail. A lot of frontline, low wage workers could find demand for

their services going down over the long term. But we all already kind of figured this would happen, right with artificial intelligence and with other technological advances. Is there something that structurally has changed or gotten accelerated beyond what people are expecting in terms of these jobs going away, it's really been accelerated. COVID nineteen has been a massive shock to both consumers and businesses, and we were forced to do things and try new ways of interacting that many

people had resisted. So for instance, remote work, I'm sitting here on Zoom and many executives had really resisted the idea that people could be productive from home. Well, now

we know that's not true. You look at e commerce or telemedicine, usage went up tremendously, And when we look at the Consumer Pulse survey results that we do monthly around the world, we find a lot of those new users that were forced to try a digital interaction are finding that it was convenient and efficient, and so it's

going to stick. So we really saw this step change in behavior during the last year UM and that's one of the disruption going forward is it's going to be different than just the gradual evolution we had been experiencing before the pandemic. Susan, This is an incredibly important conversation from an economic perspective as well. When we talk about wages, we talk about the employment rate and what we're targeting

here in the United States. We've been talking a lot about the Federal Reserve this morning and how they're aiming for full employment of possibly three and a half percent. Is that type of unemployment rate possible in an environment where a lot of services jobs, where a lot of these lower wage jobs that you're talking about simply disappear.

It's possible in the long term, but it's going to require people currently in those low wage service jobs to gain skills to get into the growing fields, whether it's a more technical feel like marketing or supply cheng management, or healthcare um or a technology related job. So the key is going to be, can we provide opportunities for people to in a short amount of time, a matter of weeks or months, uh, learn the skills they need to get into a career letter again on the first

run of the ladder that moves them upward. Okay, so the skills that they need is this sort of computer programming. I mean, what skills are the important skills for a vastly transforming technological backdrop that takes you know, a lot of flexibility. Frankly, well, what we need is people with a lot more specific, job specific vocational skills. But yes, obviously we're gonna need a lot more people in technology. But there's good news for people who are not uh,

technology folks. We need more workers with socio emotional skills because that's what machines don't do. They're not very good at coaching and mentoring, training others, teaching UM, care giving roles UM. We also need people with creativity and critical thinking. But I think for the vast majority of the workers were talking about they are going to need to switch occupations.

All I need is a football. So there are now a variety of programs across the country in where in a matter of months, you can teach someone, say the basic skills to be a certified nurse assistant, and then that gets them on the on the career letter in nursing. Or you can go to a coding boot camp and get your first job in I T support UM and

get onto a digital career path. So we've got to think about those types of programs because for people mid career with families and mortgages, you know, going back to school, even community college for two years, is simply not going

to be an option. So there's a real question here structurally about what this means for the society, and not to paint this in such a big brush, but I was reading this Project Syndicate essay this week by Standford professor Michael Spence, where he was talking about how we shouldn't be looking at greater unemployment as a result of artificial intelligence and some of the technological advances, but rather a greater dispersion in wages, a widening in the wealth gap,

the wealth disparities that we see people at the high end earning that much more people at the low end UH and learning that much less. How concerned are you about that? Well? I am concerned. The fundings of our research show that UM is possible over the next decade that all the job growth is going to be in jobs that are currently high wage, meaning the top thirty

of the income distribution UM. What that means is that all the folks now and lower wage jobs or middle wage jobs are going to see flat or declining demand for what they're doing UM so, and we see that already in the employment data right the level of employment for high which jobs recovered by last October, whereas we're still at double digit unemployment rate for people in low wage jobs. Susan Lund, Thank you so much for being with us. Susan Lund, a McKenzie Global Institute partner on

this really important topic. M 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