Surveillance: Fed's Inflation War With Dudley

Robert Lucas invented my concept of expectations. The Giant from Chicago was one of my first interviews when I joined Bloomberg. Always controversial within economics. And William Dudley of Berkeley Goldman Saxon, of course, the former Fed President for New York, has driven the conversation this morning, making it clear this is a federal reserve system is fighting the last war. Let us go to the ornament. The economist Deshel Hammett, this

is some Jeremy Rudd's controversial paper right now. This is the great detective author of another time in place. Nobody thinks clearly, no matter what they pretend, that's why people hang on so tight to their beliefs and opinions, because compared to the haphazard way they've arrived at it, even the goofiest opinions seems wonderfully clear, sane, and self evident. Bill Dudley. That's in Jeremy Rudd's paper on expectations is our belief in inflation? Expectations are belief in gaining the

future through what people believe the future will believe. Is it over? I think the key question is how to households respond to high inflation. They revise up their expectations of inflation, and is that effect their behavior or are their threshold effects which Jeremy Rudd talks about, where in other words, they only react one's inflation and we just get to a certain level by actually starting to change where they are actually willing to, you know, switched it

from one employer to another. I think Jeremy is raising some interesting questions about is our model of how inflation is generated correct or not? Built the essence of your pace this morning, I think it's been at the epicenter of your call for much of this year. You think the Federal Reserve is gonna be too late, and when they start, they're gonna have to move quickly. They're gonna

have to move faster than people expect. What's the argument that underpins that, cold Bill Well, I think the issue is that the FED learned some lessons from the last crisis, but they don't really apply to the current recovery. Lessons from the last crisis, where it was that inflation we had trouble get pushing inflation back up to two uh. They thoughtful employment was at a higher level of the

unemployer rate than it actually turned out to be. So they revised their mo entary policy framework and they said, well, we're really going to really work really hard to push inflation up, and we're gonna work really hard to push the unemployment down to level past full employment. Well that's great for that last cycle, but what about this cycle. We already have inflation above the offense target UM, and we have a lot of uncertain about how much slack

there actually is in the libor market. So I think the risk is that they're fighting the last war. The problem isn't inflation too low, that the problem is inflation too high UM. And I think we also have all this all these questions about you know, how much slack do we actually have in the U S. Libor market.

The one question is always hard, but what it's a question we have to ask, when do you think this Federal Reserve will realize come to a realization of what you believe, and what will lead them to have that read think well, I think the interesting question they have in the current set of projections is they have the unemployer right going below their view of what's maximum sustainable employment in two UH and staying there through if they

have in their forecast inflation falling over that period, and they have the Fed not getting back even to a neutral monetary policy setting by the end of four So I think what they're going to realize is that if Monterrey policy is this easy for this long, at this type of a labor market, they're going to have more of an inflation consequince they have written what they've written

down in their current set of projections. Bill, if you're right, faster, Bill, if you're right, why have we not seen more material wage pressure, wage increases that actually exceed the pace of consumer inflation more dramatically. I think it's still early days. I mean, we've just emerged from the pandemic over the last year, and the employment rates come down sharply over the over the last year. I think it's really too

soon to say what's going to happen to wages. Uh, the Employment cost Index is the most reliable indicator on wages that only comes out once a quarters. So we're still looking, we're looking backwards. That's sort of old information. But you've made the argument, I have to get back to neutral more quickly. You've talked about the speed Let's talk about a speed limit. What is the speed limit? Now? How high can they go with the Fed funds right

in an economy like this one. Well, I think they can go a lot faster than what they pencil in. I mean, if you look what people have reacted to the last from C Minute meeting as as the Fed being really hawkish. But if you look, if it takes three years to get to a median federal fund rate at one eight percent, that's not a very fast rate

of obtaining. A comparison would be the two thousand four, two thousand sixth episode for the FED raised the fund raid a quarter point seventeen consecutive from meetings, taking the fund raid from one percent to five and the quarter percent, but it could be but it could be something a lot more than what they've got. Christ In, it's seventeen and it's not that extreme, Bill, But I'm just trying to understand whether this economy with this much deck can

can take those kind of moves. Well, I think you're right that that they're not going to get all the way to probably five percent, because the economy will start to you know, react to that, to that burden. But it seems to me that it's reasonable to think that the fall Reserve is gonna have to get to a kpe montary policy setting before the end of belt. Great

conversation and fantastic pace. Bloomberg column out this morning on Bloomberg dot Com and on the Bloomberg Terminal built Duntley There the Waterful built Downtley, formerly in the New York Fed and now Bloomberg opinion columnists and senior adviser to Bloomberg Economics, Christian Nelson, Jotscha Bank, Private Bank leve We'll see, Christian, what should these central banks do in the environment like the warm we're in right now? So I think very important.

Right where the market is changing, it's not new that there is inflation coming in. We have always talked about base effect, but now, especially in Europe, gas prices really skywriting yesterday and today even more. I think there's really the scenario that there is this call its deflationary supply side chock. And of course you have the question what the center banks should be doing. And let's not forget

you talked about the fat um here. The e c D is not having the goal of of really economic growth. It's just price stability, and that's why they are probably concerned about this if we stay at these levels or even go further up. But I think they are not in a situation to really increase rates as you would normally do. If you see your flationary pressures, they are still saying it's transitory. We are more in the camp

that inflation will stay higher. And if you talk about fighting war was I agree, it's not the inflationary war is a bit more inflationary. However, that's not bad for the central banks if you get a bit more inflation. In the question though, is is it too fast now and they need to act? Christian is tapering tightening? I would say, of course it is yes, because you take let's say money you don't supply to the market, anymore.

The question though, is what's the speed of tapering? Do you do you step by step or do it very fast? And the markets can react to that, and I think that's where the center branks are quite confident to get this done. So I would not conum. Let's say it's the same situation combined this with two thousand thirteen tape on tantrum. That's I think not the Christian you admire.

With this weakness in the secuity market this morning, sorry say again you are buyer of the weakness we're seeing on the screens this morning in the secuity Yeah, cautious in the markets. We have been expecting a downturn and we don't think it's too too early now, so we are waiting a little bit too to go back into the markets. I would say if you look at the US, for example, I wouldn't be surprised if you see a setback to the two on a day moving average in

the SNP. I wouldn't do that out because they are some some topics that could weigh on the market also in the next days and weeks. So you see the energy prices, gas prices in Europe, cold prices in China, so China GDP from becoming maybe even weaker than expected. You have the earning season to start where I would say the growth rate is not the same as we have seen before, and that's because they're both there. Don't get me wrong, but I think there will be some

better opportunities throughout the next days and weeks. Christian were being buffeted by the temporary as you write in your important note recently, how do corporations in Europe, how do corporations in America? How do corporations in Asia adapt to the temporary six standard deviation shock of net gas? Well, the issue with gases with the companies is that they normally have to take contracts with their clients, so they cannot increase the prices as the incoming prices, and that's

why their margin is drinking or even getting negative. And that's why some companies have been saying we are reducing output, and of course that's weighing on growth. And then you have an issue with with the growth in general, because everyone needs energy, and I think that's why it's so important. If it's going so fast, I would expect that this is the governments are saying, Okay, what can we do through this, do we take some actions on price cips.

We've seen that already in Europe, in Spain, for example, the UK is obviously just nothing that, but also European Union with let me discussed that. Christine greed to catch up. What a morning for it, Christian Deutsche Bank, Private Bank, Globo see. I Oh, this is a joy. It's always a joy because she is what we try to do in America. I'm not gonna mince words, she started out, challenged overcame dyslexia, was picking up a phone at a real estate company and said, wait a minute, I can

do this. This is the only voice I want to talk to on the insanity of real estate right now, Barbara Corker. And of course you order from Shark Tank, she joins us. Now, but Barbara, as you give the spirit the small business and all like you invented, I need to talk to you about the pricing of housing in America. I just looked up at Corcoran Group and I'm gonna pay thirty four thousand dollars on taxes on a piece in Brooklyn. How have we done this? How

have we priced America out of real estate? Well, most people are priced out of the market here exactly right. The market has been going absolutely bonkers with no end in sight. No prices nationwide have gone up. I have never seen an increase like that in the thirty years. The last thirty years, I think it was the last time. No one could believe what's going on. In fact, if you want to buy a house, I don't know how you did on your purchase, but everything is being sold

in bidding wars A six of the houses. I mean, people are so uncomfortable, and yet they keep paying the prices in this no end insight. Barbara, I looked at the meat, the regression rather of housing and oh four oh five, oh s X and you know what, we regress back to the mean you live that at Cork and group. Are we going to do the same thing this time I did? Are we going to do it again? No,

it's not the same kind of a market. No, no, no, no, you know what you have it says, market is fueled by individual buyers who want a better place to live. They bring their businesses home, they want to raise their kids. When we had that drop off, it was fueled by investors, house flippers, poor mortgages that shouldn't have been a mortgage, mortgage companies that should have been lending money at the time. I mean, it was a it was a false market with a false bottom and it fell. We're not going

to have that now. I'm just hoping that the price is cool down a bit, because, as you started to say just a minute ago, so many people are left out of the market. It just seems unfair. Just to have a house, you have to feel like you have to be a pro investor bidding up the prices. It's it's just insanity. I've never seen anything like it, Barba. This is for individuals, but it's also for small corporations, and I know you do speak with a lot of them.

I'm one during how much this dampens their enthusiasm, their optimism, their willingness to hire, to expand. If the fixed costs are going up as quickly as they are. With the fixed costs going up for business, that's not always true, all right, Commercial rents are much lower than they were if you were talking about business. I'm assuming, right, yes, yeah, yeah, so that their fixed costs are actually lower. People are

renting less space. People who have large floor plates in large ventro Politan areas are negotiating their way out of the leases, the subleasing, the space. Retail prices have come down. No one wants a large retail space anymore because it's a shop front versus holding all of the inventory. They don't do that anymore. They sell it online. So actually the cost of doing business has come down. And of course the problem, the main problem with all of business

right now is finding the right people. That is the single largest challenge. Whether you own a restaurant or shoe shop or a giant corporate ration, hiring and finding and luring in the right people has been the biggest challenge. But Barbara, we have not seen the increase in wages that we would have expected given all of the labor market shortages that we hear about. In fact, it still

lags behind the pace of inflation. Bill Dudley, formerly of the New York Fed, was just on the show and he was saying he thinks it will accelerate pretty dramatically in the near term. Do you see evidence from small business owners that they are willing to pay up that much more dramatically in the upcoming months that will lead to that kind of wage inflation. You know, if they had they're going to not have a choice. So far, they've had a choice. They've cut back on this staff.

They intentionally cut back on their overhead. They got rid of everybody they really didn't want working for them. During the pandemic. I mean, all these companies slimmed down and got the house in order. Whether or not they're willing to pay a higher wage remains to be seen. But so far they are not people holding onto their profits and I'm very reluctant to let any of that money out.

It's more I don't want to use the word selfish, but I would say, yes, people want to a little greed has set in, but they're gonna have to get They're gonna have to give something. Question you in support with A T and T are actually out there talking to real people. These are webinars and things like that where Barbara Corkrand Folks is talking to people about small businesses. Let me raise my hand in the back room of the zoom call, Barbara, could you do now what you did? Then?

Yes I could, because you know what, the pandemic has proven that and that's what the purpose of the Business Unusual webinar series presented by A T and T actually is. We're trying to give people the tools they need to

reinvent themselves with very little money in their hand. And today's market accommodates that everybody is rewriting their business plan, redoing the way they deliver their products to customers, reinvent how they could attract customers in And that's actually why A T and T decided to do the webinar series, because a lot of people don't know how to do that. I know how to do it. I know how people who could tell people how to do it. Barbara, I'm

looking for four bedrooms upper East Side. See what you can do this afternoon, Barbara Corkrand, thank you so much with the a sublease on my place sub sub lease, Thank you so much. Barbara Corkin Serato, Japa joins US right now with Sucken Socigi General as a US rate strategist. Sobrata, it's an interesting movie here. Let's start with what has

not happened? Why are yields not moving like net gas? Well, because of the fact that you know, we're a big market and we look at fundamentals um you know, and bond yields in general in the US have been some more you know, slow to react to what's happening on the commodity complex because it's not that big of an issue. I think that the specul moves in that gast especially are quite speculative, so I'm not sure that there should be a reaction in the bottom market from moves in

that gas. But broadly speaking, I think higher oil prices and fears of inflation have been driving yields higher. Nothink that sort of trend is here to stay for the remainder of the year. Among others, Lisa Brandow's has really emphasized the paper out there in the insatiable demand for it. If I like yield at one point three five priced down, yield up, I gotta really like it at one point five five. Is there a huge thirst here to buy

the dip in bonds. I think what you're going to see from investors is some level of caution given the fact that we've seen this sort of very sharp move from around one thirty prior to the f o MC meeting a couple of weeks ago to around one fifty five, and the momentum seems to be towards higher yields given headlines around inflation. I think what you're going to see over the next coming weeks is more cautious approach in the barn market. You know, you're not going to see

deep buyers coming right away. They're going to need to see tenure yields stabilize. I would say between say one fifty and one seventy before they come in and start buying the market here. So I think over the new term they probably stay in the sidelines, especially heading into payrolls this weekend, and then beyond that I think that would be stabilized into a new range. Then you'll start

seeing investors coming in and buying the depth. So Beno, many investors, many legends of the investment world are worried about this s word, and I want to discuss it with you. I think it's a difference between being an economist and looking at stagflation and saying the stack piece of this does not work. We just had anice M north of sixty grosser expected to have a four handle

through next year. That's not stagflation. Market participants are looking at rady change and saying, look, gross decelerating and inflation expectations are still elevated, and maybe they might accelerate into a new year. I want to understand how a bond market behaves in that kind of environment of decelerating growth and persistently high and like what does that look like?

So I think that inflation expectations should rise modesty, especially given where inflation expectations are in the UK or Europe. And this is not just a US phenomena. You're seeing global inflation expectations rise quite meaningfully. We actually did the chart comparing inflation expectations across different regions last week in our weekly and what you notice is that US tenure break evens, for instance, have been very much in a range and and sort of until yesterday they've kind of

been hestited to break above two forties. So I think of inflation risks persist, you're going to see room for break evens to continue to rise from here on. But broadly speaking, I think that the fundamental picture is very supportive. Growth is quite strong. Um, you know, yes, we're seeing a revision revisions to growth in the third quarter, but that's just pushing out growth for into the the upcoming

quarters as well as well into introllect here. So it's not growth that we're losing, it's just kind of getting postponed. There's no derailment, there's just a postponement if you will, on on growth. So in that sort of context, I think that you'll should continue to rise and entration expectations perhaps continue to rise as well, at least about with the classic em dilemma and AGAM. Central banker often confronts upside inflation risk, downside growth risk, and often they do

one thing, they hike. I'm trying to understand what DM central banks are going to do through next year. Well, they have the patience, do you think the tolerance to sit this one through? I think they will. I think that, you know, like I think Fed Vice Hip Tarata said, they want to really see what the inflation prints are up to the end of the year and beyond to see if there's really a persistence of inflation. So they're not going to really rush into guiding the markets towards

hiking or rate heights anytime soon. They're still focused on the taper announcement, which is probably going to come in November, regardless of what happens to the unemployment report on Friday. I think beyond that they're going to need to see some consistent pressure supply chain pressures, wage pressures before they

start thinking about hiking. It's but what they're doing right now is setting up for the ability to be to raise rates in the second half of next year by finishing the tapering, perhaps by the middle of next year. They're going to be tapering bonds at a time when there is this market deceleration in growth. And I do want to circle back to this idea of the s word,

the stag fit siflation debate. How high can yields get if we do experience an environment like that not later this year, but even next year as some of those bond purchases start to wear off, as we start to see a more normalized economy with the supply chain disruptions still in full force. So I think the tapering of acid purchases on margins should actually help push yields higher.

If anything. I mean our forecast, we think the tenny years probably get to you know, two and a quarter by the by the third quarter of next year, so that's sort of the time frame that we're looking at a very gradual rise in yields UM. I think that over the last couple of weeks the market has very meaningfully priced in a much more faster pace of great tax So that's putting some pressure in the belly of

the curve right now. I think the market seems quite efficiently priced for hikes for the for the next three years up to four. We just need more data for the market to be able to price in perhaps a much more faster pace of of hikes from here on. So really I think there's going to be a very gradually pricing higher as we get data over the upcoming quarters. How much potential is there for significant policy risk due to the composition of the Federal Reserve at the time

when it's increasingly politicized who will be the next bed chair? Um? I think that there is some policy risks, clearly. I still I still view that. I think chairs chairman power gets it, gets another you know, extension in this term. Um. But for the most part, I think if the composition changes, I think that the composition might actually turn more dubbish. So if anything, again, more caution, more accommodation is probably how the composition will change. So, you know, the big

scheme of things. You know, the FED is an independent body and they're going to look at fundamentals before they make any sort of major changes in their policy, so I'm not necessarily concerned about any change in the composition for SAE Savantria. Thank you as always, Evantia, that of Silk gen U s right strategy head for the first time in this pandemic. We welcome Mr Rubinstein into our studios. Thank you so much for joining us here. Pleasure took

you what three days to get into the building. It's a little more complicated, but it's worth it. And Mike's really done a great job of trying to make it, you know, not not comfortable, but just processed driven. So we get it. Maybe that's gonna be the future for business. Julie Sweet has to deal with this at Accenter. She's going a different path together. First of all, tell us how the Columbia Law grad is different from what we see at McKinnon, the and the others. I remember, Accenter

is a publicly traded company. It has a market cap per year the last ten years, right, more than two hundred billion dollars in market cap. So it's one of the largest companies in the world run by a woman, and she has trained as a lawyer, not as a consultant. And they are one of the biggest. They are now the biggest consulting firm in the world at Center, which was a spinoff of Arthur Anderson many years ago, and they've just done a better job in building their presence

around the world. They have now six thousand employees. What I find it interesting here, and she's really from two thousand ninety really pushed the needle. I would suggest on this in an example to other corporations is the reigning debate of work from home. How did the best and brightest work from home versus work from the Carlisle office. Well, it turns out that during COVID, people that have technology

skills can work from home. Now, as you know, businesses are now saying we want to get your employees back. But during COVID, when you had to work from home, AC Center did a great job of of doing this with their clients. They work fromly with their clients and it worked out so well that they had to add a hundred thousand eployees during the COVID period of time. David. One of the reasons why I thought found it so fascinated that you, of old people interviewed Julie sweetest first

by your fantastic interviewer. But also she has a law degree. She was a law firm partner, that is how she came into this company. And you also have a law degree from the University of Chicago. What is the intersection that you see as increasingly relevant or not going forward of having a law degree in business in the changing world we're in now. Well, she was a partner at Kervass, Swain and More, and I was a summer associate there.

She was much more senior than I ever was at that firm, but she showed that she was really really analytical, could get along with clients. And I think a law degree helps you reason. Well, clearly a lot of CEOs have law degrees. Obviously some have NBA's, but a law degree gives you a certain grounding in a certain way of thinking logically about things, and clearly it helps you solve problems. And so I think she thinks her law degree really has helped her run Act Century. I should

point out that she runs it without any headquarters. At Center has no headquarters. She's based in Washington, but it's one of the few companies in the world of any size that doesn't have a corporate headquarters. So you have that on one side, or basically she's saying, you guys don't have to have a seat in the office, you can work from home. We can make it work. And then you have others, particularly on Wall Street, where people are saying, if you don't get back to the office,

you probably are making a mistake. If you're a junior employee, where do you weigh in on this. I think most employers would prefer to have their employees in the in the office a few days a week. I think Wall Street people are saying, come on back at least a couple of days a week. Maybe not five days a week, but at least a couple of days a week. I think JP Morgan, Goldman, Sacks and others are warning their employees back in the office, but not necessarily in five

days a week the same hours as before. I think private equity firms are largely the same. We would like to have people come back when it's safe to come back, but it may not be that people will come back and work five days a week the same kind of way they did before, and that way COVID has really changed the way people are gonna work for quite some time. What does it do for business? Travel. What you know, the airlines are talking premium excuse me, business class to

premiums alls, jump through hoops? What's it actually due to business travel? While business travel was down on the on the airlines, leisure travel is beginning to come back better than business travel. Business people have realized that you can you can do things remotely and certainly by zoom or zoom equivalent without having it. So you and I don't

need to go to Davos. I think when you have a large gathering of people, it probably is helpful to get together occasionally, and Davos is once a year, so I think if you weren't, we're going to go. Yeah, what about accenture? What about accenture is dealing with clients remotely? They can deal with them in person. But I think if you once you have the relationship, you can work on a project remotely and probably help solve it. But I do think if you don't ever see your clients,

I think there's a downside to it. And I think most businesses now realize you've got to have some interpersonal connection if you're really going to have your employees be mentored and your client and feel like that people are paying attention to them, David, this is a crucial conversation also to have on the CUSP on the eve of the Job's report that we get on Friday, at a time when a lot of companies are complaining about not being able to find the workers to hire et cetera,

hired a hundred thousand of them. How much are you hearing from Julie Sweet and from other executives who speak to how willing are they to pay up for employees for for talent at this moment given what we've seemed to be seeing, which is friction and shortages. Well, and as we all know, companies that are in the technology world and financial service world have done extremely well. They can afford to pay up, and they are trying to

pay up. I think the biggest problem is at entry level kind of jobs, the kind of people that are working at large private equity firms are consulting firms. Um, they are not as difficult to get, though they're harder to get them they used to be. But it's getting people to work at McDonald's or the equivalent entry level jobs. A lot of those people are not willing to work at minimum wage or even slightly above minimum wage. Now that's where the real problem is, I think in the economy.

The other day, David Rubinstein, I've got to leave with this with your public service to the nation. With James Earl Carter, it's as if Lincoln was alive in nineteen o six. Jimmy Carter seven birthday, What did you get wrong? With all the criticisms of the ear of the dismal seventies, what did we most get wrong about President Carter? Well, he tried to do so many things that while he got a lot of them done, the fact that he didn't get everything done made people think he wasn't as

successful as he really was. Today, if a president gets one major bill done in a year, that's a big thing. Carter was getting many done, but he was trying to get even more done. So I think we underestimated his capabilities. And also, in hindsight, some of the issues he challenged he attacked, like human rights abroad, were things that were ahead of his time. But in the end, uh, I want to wish I'm happy ninety seventh birthday like everybody else.

And I think his ex presidency or post presidency has been a real model for all presidents of the United States, David Thinkings, Almost David Rubinstein. This is an important interview. Julie Sweet is out front in accenture, trying to figure out modern achnology and business. 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