Surveillance: Fed's Path with Mester

to your Yale, they'll go to logs. Michael McKee and I really, well, we really don't do that. Bramo doesn't really do that. But someone that can go to logs and look at the rates of change of our economy is Lorettemester of the Cleveland Fed. She is definitive in mathematics out of Columbia and Princeton and joins our Michael McKee here at our world headquarters. Michael, thank you very much, Tom, and we'd like to welcome Cleveland Fed President or Atemester,

to our viewers and listeners worldwide here on Bloomberg. Tom said, you're the math expert. You look at the ADP numbers, we might as well. Start with that because it's just out one hundred forty five thousand. I know there's questions about their methodology or what it means, but what do you take away from it? Well, we have to look at all the data, So that's a data point that

we're going to look at. We're going to get the employment report on Friday, so there's just a lot of data coming in and we're going to use that to assess not only where the economy has been, but where it's going, because, as you know, it's about where the economy is going. That's really important for setting monetary policy. Well, that was one of the questions that they were just asking me in the surveillance studio. How do you know what you're looking for when the data are in the

rearview mirror. Well, you know, the data and the rear immunal is important because it tells you something about where the economy is going. So you don't throw that data away. But you also have to do a lot of other kind of reconnaissance. So you know, the nice thing about having feder reserve banks across the country is that we

can talk to contacts in our districts. You know, whether it be labor market contacts or business contacts to really find out what's happening on the ground at the moment, and that information, anecdotal information is very helpful as well. And then we do surveys and other kinds of work timely information. So all of that goes into sort of formulating monetary policy. So I think it's wrong to think like, oh, we're looking only in the rearview mirror at data that's

from a month ago or two months ago. That data is actually helpful for looking at trends. And then we also augment that with other data about what's really happening on the ground on main street for businesses that have to cope with this economy, Well, what's happening on main street? It kind of two parts in general, what are you hearing and then what are you hearing from bankers in your district about credit quality? Right, so credit quality is

still fine. Bankers are telling us that that isn't really a problem. It might have ticked up a tad, but it certainly is still low, very low by historical standards, So that isn't a focus. Now the bankers have, you know, struggled with retaining deposits storing the March tensions in the banking industry, but that has stabilized since then in terms of credit quality, in terms of credit standards. You know, they had already been tightening credit standards as interest rates

went up, so they're continuing to do that. They're continuing to monitor, you know, their customers, they're continuing to monitor going forward in terms of making sure that their well positioned for the economy with higher industrates. In terms of the businesses themselves, of course, they are preparing right for I would say some slowdown in the economy, but a lot of the firms are still telling us that their

conditions are still pretty good. They're worried about the economy in general, and so they're being a little defensive now, some pullback in some of their investments spending. But again, it doesn't feel like everyone thinks that we're going to have a deep recession. It's just they're trying to be more cautious so that they're well prepared for whatever happens

in the economy in the future. Well, the recession argument that a lot of people are making sort of depends on the idea that the full weight of all the cumulative weight of your rate increases hasn't hit the economy yet. Plus we throw in the banking maybe tightening credit standards a little more. Are you worried about the second half of the year. Well, I do think that growth this year is going to be well below trend. And you're

right the banking tensions certainly. Typically when you see that happening, you do see banks pullback on their credit standards and tightening their tightened their credit standards. We don't know right now either the ration of those effects from what happened

in March or how strong those effects will be. So we do expect that to happen, but right now we're in that time where we're assessing, talking to the bankers, looking at things like the SLUICE, which is the Senior Loan Officer Opinion Survey, to get a really good sense of where bankers are. As I said, even before the March tensions in the industry, banking industry, you know, the banks were pulling back and tightening credit standards, and that's

kind of normal. That's the normal flow of monetary policy tightening throughout the economy. That's one of the ways it gets pushed down into the economy. So that's fine. That's kind of what we are intending in terms of making sure that we can slow down demand so that we get a better balance between demand and supply and reduce those price pressures. And now we're assessing whether the tensions in the banking industry have augmented that, and that's part of what the evaluation will be as we go in

to the next FOMC meeting. In terms of calibrating monetary policy. Well, you're in New York. All the big trading guests are only a few blocks away from us, and they're calibrating recession right now, and that you're going to be cutting rates not once, two or three times before times by

next January. How do you process that view versus yours? Well, you know, we've seen periods where the markets have one view of what's going to happen in the economy and the FED has another view, and you know, we certainly take information from that. You know, we see what they're doing and we're saying, Okay, that's their view, what's happening.

We have our own forecast. We just put out forecasts at the last of home C meeting, and if you look at those, we did say that growth this year was going to be very much below trend growth, and so I think we see things a little bit differently in terms of what the appropriate monetary policy is given where the economy is and where it's going. We certainly are focused on in and making sure that inflation gets

back down to two percent over time. Well as the idea of four rate cuts in the next year crazy, well, it certainly isn't my policy path. I mean, I think we're going to have to go a little bit higher from where we are a little bit more and then hold there for some time in order to make sure that inflation is on that sustainable downward path to two percent. That doesn't mean we're going to continue to raise rates

until inflation gets back to two percent. We're going to be sort of calibrating in order to see that inflation is going to move down. In my own forecast is that it will take some time to get inflation back down, but I you know, I think we're going to make some appreciable progress this year and then continue to make progress next year and then hit two percent in twenty twenty five. What's your trajectory for inflation? Where can we

end the year and how fast would we get there. Yeah, so I'm about three and three quarters percent by the end of this year, continued progress next year, maybe two and three quarters, and then two percent in twenty twenty five. And I think that's a good progress. But you got to remember we've been at high inflation, well over two percent for quite some time, and that's why it's imperative that we continue to make progress and then we continue

on this path. Now, we're going to be judicious about it. We're not going to, you know, you throw the baby out with the bathwater, as they say. We're going to make sure that we're making good judgments along the way. But it is crucial that we get inflation back down in a timely way to two percent. Well, you're talking about throwing the baby out with the bathwater. But the old adage is the Fed titans until something breaks. What would you say the balance of risks is now between

something breaking on the growth side and unemployment side and inflation. Yeah, Well, I'm hoping we don't tighten until something breaks. I don't think that's the strategy that I would like to follow. I think we've got to be judicious about and try to calibrate our policy in the correct way. I mean, we've made a lot of progress in terms of where we started. When we started raising rates, we were at

zero right, and we've come a long way. So we're making progress on getting to where we need to get to. And my own view is that we're going to have to go a little bit further, but we're certainly well on the way of where we need to get to. And then we hold for a while, and yes, we can recalibrate our policy if the economy evolves differently than we're anticipating, and that's the nature of monetary policy making.

You want to be able to take all the information in set a policy path that is consistent with getting back to full employment, maximum employment and price stability. And then if the economy evolves differently than you anticipate, then you might have to adjust your policy path and you need to be open to that, and especially in a situation like this where there is high uncertainty. There were high uncertainty and the economy before we had the tensions

in the banking system. That tension in the banking sy some of the stresses in the bank in those banks has added more uncertainty, and so you've got to be willing to sort of take in more information, look at it and reassess if need be in terms of where policy needs to get to. Well, you say we should do a little more. The consensus median dot was five point one, which would be one more rate move. Are you in the group that was above that? How far

do you think? Well, I see a little more inflation pressures than the median in the SAP from the December sep so I probably am a little bit higher than the median dot. But again, I'm open to making sure that we're setting policy to get inflation back down to two percent. So I'm open in terms of let's take in what the economy is telling us about where it's going. Let's make sure that we get inflation on that sustainable

downward path. So I'm not you know, we've made a lot of progress, and I'm willing to sort of let's take it in and look at where the economy is going. Own view is that we'll have to go above five percent, but exactly how much, precisely how much, and precisely how long it has to stay above. We've got to be open to allowing the economy to tell us is great increase on May third, a certainty basically locked in at this point too soon. I heard the promo before you're right.

I'm going to tell you that we have a lot more data to get to and we'll see as we get there what's happening in the economy. Again, the economy is going to tell us where it wants us to get to. Well, Loretta Mester says, I'm right, and so that's a great place to stop the interview. Thank you very much for joining us today here in New York, and we'll look on May third to see if I'm still right. I'll send it back to you, Michael McKee,

thank you so much. We are here in our studios looking at markets on the move off that ADP report, maybe even off what we heard from doctor Mester as well. My major takeaway there I heard elements of dragging is Loretta Mester are confidently looked out to twenty twenty five, a longer timeline than maybe what we would see for many One of the great joys of speaking with Claudia Sam Yes a former FED economist and Sam consulting and

writing for Bloomberg Opinion and always controversial. I got eight ways to go here, folks, and I'm gonna go to the sam you don't know which is she voraciously reads top flight fed research. Claudia, Sam, you go to San Francisco and Adam Shapiro, and you say his mix of what is driving this inflation is something we need to focus on, and that is the part of inflation off of the plant pandemic that is supply driven or supply side.

Explain that. I think a big mistake that we're making at this point is acting like we can use past relationships in the economy to tell us what to do. The pandemic was extremely disruptive, and we see that across many of our peer countries. Set aside monetary policy, set aside fiscal policy, and I'm concerned as time passes that that gets pushed to the side. And that's why I go to Adam Shapiro's research. I think he is one of many who is carefully trying to figure out that

supply that demand. The theme that I'm seeing into the IMF and World Bank meetings in my conversation Claudia tomorrow with doctor Georgieva at the IMF is that the analysis now like I've never seen, is linking monetary policy with our fiscal debt and our fiscal dynamics as well. Can we meld together monetary and fiscal analysis, whether we agree or agree to disagree, There are definitely some connections. I'm not sure the ones that we're making in terms of

financing the fiscal debt. I mean that is a direct effect of these interest rates going up so quickly. I have pushed for and I think you're seeing some signs of it, particularly in Europe, understanding we cannot let the FED go it alone on inflation. The tools they use are going to cause a lot of pain, and there are things that fiscal authorities can do. It's just we don't have a lot of practice at that. Claudia, have you been surprised by how resilient the economic data has

been up until this point. I've been very thankful. I mean, the Fed is trying to get a slow path back to inflation down, so no recession, no severe recession. That's where markets disagree with them. And the only way the Fed gets that done with the kind of rate increases they've had is if the consumers keep coming back, right and if the jobs remain there, even if it slows down like we are starting from a position of strength that has never been the case going into one of

these cycles. How high should the Barbie Claudia for the Fed to cut rates, given that they still do have the issue of inflation very much front and center. Again, we have this disagreement about what kind of recession, if any were faced. I think if we go into a severe recession and the Fed holds on to this, we must stay the course no matter what, that would be a big mistake, you know. But I take them at their word, I really do. They are going to keep

at this until inflation is moving down two percent. Whether I agree with that or not. Tell me about the speeds that were worth right now? Geta gopinath that the IMF talks about this about. I think it's like a general policy English if you will, for Notonian calculus. The rates of change right now, including the huge surgery saw on interest rates, has to be front and center. What are those speeds right now that we're seeing in interest

rates as it folds into Fed policy. This is one contention I have with how the Fed thinks about the interest rates. They're very focused on the level, like getting the inflation adjusted function above and it's like, come on, like you raised interest rates so quickly, we know interest rate risk is there. That if we don't learn any lesson from Silicon Valley Bank in terms of the interest rate risk and monetary policy, that isn't absolutely missed opportunity.

And as Lauretta Mester was saying, we see the effects in the standards, lending standards. It is there, it's coming. The last place it shows up is inflation, right, you know it's in train. I want to cite this carefully off of Gopenf's work. We'll be talking with gy to gopen Ff here next week at the IMF gy to Gopenef talking about the speed effects that are out there. What would be the effect doctor, some of lower rates or a pause? Dare I say how about pause? Pause? Pause?

Would our world fall apart? No? I think it would give the world a chance to catch up with what the FED has been doing. J. Powell has been very clear we have started a disinflationary cycle. We know it's coming in housing that that just is a LaGG Just let everybody catch up. This is a speed issue. The FED went really fast. There is an argument for it.

Just let it work right, have some faith in what you've done so far, and that's why pushing harder it could go to a very bad I can't say how controversial the tone is there from doctor some within the economics now she is just saying, there's a school of Thunnis.

Would everyone just calm down, stop listening and watching bluebird surveillance and just slow down and breathe that's out there and analyze what exactly has happened to change the labor market really kind of fundamentally since the pandemic, Claudia, can you make sense of this? There was a recent study that came out that showed Americans are spending substantially less time working and they were pre pandemic about about half an hour, which doesn't sound like a lot. But this

is adding to the constraints in the labor market. How much is the FED taking into consideration some pretty profound structural changes when they look to what they need to see with respect to unemployment rates as well as wages. So not enough, But this is not a criticism of the Fed. Again, we are in some uncharted territory and just because we get a study last week doesn't mean they were able to integrate it in the rate decision

in January. Right, this is there are a lot of pieces coming together, whether it's work from home, whether it's getting the retirement done. They're just a lot going on. And I have a lot of concern that when they are doing the forecasting, those models are based on past relationships and they're not able to integrate what community members are telling them. I mean, I saw this. That's really hard to bring in in real time. It's really hard to bring research in. The bar is high to use

these things in policymaking. Claudias, well, we'll have to leave it. There are out of time, Claudia. But doctor Sam, thank you so much for joining us today, of course her work with a fed Claudia sim Consulting. Joining us now is Khaki Chountry, the head of I Shares Investment Strategy Americas at black Rock. Khaki, wanderful to catch up with

you and good to see you as always, Ghak. I think we all want to know just how much demand is they're still for treasuries based on what you're saying, Good morning, guys, great to be here, and a tremendous amount of demand is what I'm going to say. So just looking at ETF flows for the first quarter of the seventy four odd billion that came into all ETFs,

about seventy percent of that within fixed income. And more specifically, what I thought that these was really interesting was that investors gravitated towards the highest quality parts of the fixed income market. So you were seeing investors move towards government bonds, towards treasuries to at the very front end of the treasury curve, and then the belly. So the seven to ten year something like the IF which gives you exposure to the ten year part of the curve had its

biggest inflow ever. So investors definitely want fixed income here, they want the highest quality fixed income and they want treasuries at these well, not great yields, but better yields than it was about a year ago. So gegy, within crisis and within fear, we need to find courage. What part of the ETF world is the courage need to be applied? Where should we be investing away from our full faith and credit fears? Sure term, you're absolutely right,

I think investors need to stay invested. I think one thing we've learned, especially when we look at the price action in both January as well as March, where we wouldn't have necessarily expected the S and P to be up or the NAZ that to be up as much as it was. So now where should investors go in this slightly volatile environment. We look at that in our second quarter outlook that we just came out with. Number one, think about quality in the equity markets and the fixed

and come markets. So within the equity market, that looks at companies that have strong cash flows, high margins, and really have the ability to have strong balance streets. So looking at quality as well as looking at growth companies, not just STACK, but all growth companies that are at a reasonable price and that can be taxed something like an X and but also can be global energy companies like an I X. So that's the equity side, and then on the fixed and come side, you guys know this.

I've talked about this on your show a bunch. We think that the new regime is one of you should be buying every backup in yels. I think we're in a generational opportunity for investors to get really high quality income in the fixed and come markets. Today's yield levels not fantastic. I think the FED is not going to cut two and a half times by the end of this year. But retan we get a backup by bonds by the front end and when we get to about

four percent by the agg and gargie. Certainly, index strategies work very well when you're talking about broad bond indexes. But does index based investing allow for the stock specific type of analysis that you're talking about. Do you see investors starting to shift away from equity index strategies as they start to shift toward greater quality. It's a great question, Lisa, So I'd say that obviously, I mean, this was a great month. March was a great month for influence, inter

qua l quality pickers. And if we look at broad mutual funds as well as ETFs industries, I mean there has been an outflow from mutual funds as such, unusual funds and ETFs when it comes to US equity specifically. But I think the crux of your question is, you know, is there a role for both active as well as index investing for investors portfolios? And the answer is absolutely yes. One of the things that I'm most fashionate about is the fact that investors can add ETFs to their portfolios.

I share ETFs hopefully in their portfolios. Active investors can do that to generate alpha in a really liquid manner in their portfolios. So yes, you can have your active A locations, but there is a role for ETFs for liquidity, for access, for transparency as well. Just pick up on some of the words you used. I think this is important. You called this a generational opportunity, which implies that maybe it doesn't stick around, that you have to get in

NAT's pickup yield. But then you said by the front end, which made me think, well, okay, if you're running by the front end, you're not really locking it in for very long Khaki, which is it wants in a generation opportunity or something that's going to stick around. So I

really hope that it sticks around. But unfortunately, every time, what we've seen is as soon as yields back up to about that four percent level, we have investors both from sort of institutional investors that are pension funds, insurance companies as well as retail investors gravity towards the add

gravitate towards duration. So you know, when we do get that back up, and I think we will most likely get a backup back to about three point seven once some of this fear around the banking crisis has dissipated somewhat. So I think that it's a generational opportunity when we get that backup, But for now, you should still be invested in fix income. So for now, I think allocating to the front end makes a lot of steps. Gaggy, thank you. Always enjoy catching up with you. Gagi Chatry.

That a flat rock. Absolutely the bond market. The uncertainty in Washington is off the chart as well. We had a huge response to the attendance on Bloomberg Surveillance a few days ago of Michael Zelden to say he's a former federal prosecutor and an American University Washington College of Law. Barely describes his commitment not only to prosecutetorial law, but to explaining it on TV. He's one of those people that comes on in his crystal clear let's go law

one on one here, sir. We did not see misdemeanors yesterday. All of the headlines today speak of felony. Explained the distinction for the former president of misdemeanor versus felony charges. A misdemeanor is something less serious than a felony. The misdemeanors in this case would have been the mere entry of false data on the books and records of the business. However, they couldn't directly charge that because that has a two year statute of limitations, and this occurred longer than two

years ago. So they had to figure out a way to make those misdemeanor business record false statements into a felony. And what they did was they said that that misdemeanor was undertaken for the purpose of promoting another crime, in this case hiding from the people of New York. The true intent of what Trump was doing, which they allege, is to deprive the people of information that would have

been relevant to their decision of who to vote for. Specifically, they paid three people, Stormy Stormy Daniels, McDougall at a doorman money to suppress their stories so that the voting public wouldn't know what Trump was up to in this sort of misogynistic way prior to the election. It's an interesting theory. We'll see how it plays out in practice. We could talk an hour today, Michael about this nuance.

I'm going to go to what I witnessed yesterday and the silliness of microanalysis by non pros like you of who held the door for whom? Did you see a normal process yesterday? Does it matter that we're analyzing who's holding the door for a given defendant? Not at all. In fact, for a few minutes I turned on the television and I heard that comment as well, and I thought, boy, they really are struggling to fill airtime because they expected this arrangement to take place more quickly than it did.

That had nothing to do with anything of substance. The only thing that mattered yesterday was that Donald Donald Trump was charged for the thirty four belonies. He pleaded not guilty. They set a next court appearance in December, and between now and then they'll be a whole host of motions filed by Trump's lawyers to try to either change the venue of this case and or to dismiss it on various legal theories. That's what's going to play out between

now and December. But let's go to the media circus, Michael, because as a former federal prosecutor, how much do you have to factor that in to a what you prosecute it and be how you prosecute it given a lot of interest in a given case. Well, you have to be very careful about that. Every individual defendant is entiled to a fair trial, and you don't want to poison the possible ability of that through a media circus. Now, I think the prosecutors are going to be very circumspect

about how they proceed. I think they're going to try to rein in their witnesses, particularly Michael Cohen, who's an ever present presence on television, which I find surprising. But I think that the biggest problem is going to be can Donald Trump follow the admonition of the judge to try to temper his I guess commentary on the case, and yesterday at moral ago he seemed to have ignored

what the judge said on day one. As you see, Michael, how this is playing out in the media, and how this playing out politically with the Republican Party coalescing behind the former president. Do you think that this case was a mistake by Alvin Bragg, Well, it depends on what you mean by mistake. If you're thinking was this a mistake to be the first case if there are going to be other cases against Donald Trump, maybe it's not

the strongest case. If you're thinking, what about accountability, Well, the president did all the activities that are charging this indictment while he was a private citizen, before he was even elected president, and most people in that circumstance would be charged with this crime. When you ask your guests as they come on for future segments this morning, asked them if they were in their business and they entered falsely these types of records, would they fear being charged?

I think the answer would be, of course. Nobody would get away with that sort of business crimes in Manhattan. So it's accountability versus political strength of the media and the courts and the public perception. And I think I go with accountability. Well, Michael, what you described was the leagal lot of turning a misdemeanor into a fenone from a d A. This likes to turn fenony's into misdemeanors. Michael,

it's not not somewhat concerning to you. Well, you know, I got a direct message from a friend of one yesterday saying she wished that he would be as tough on other types of crimes as he appears to be on Donald Trump and this type of crime. And I guess the point is fair enough. But it seems to me that if you believe that what the president did or the handy it did in order to win the presidency was a crime, then you bring that crime, and you bring it for all its worth, which is the

fellow he charges. Michael, Thanks for bamanas today, Fellful stuffs always Michaels out in a at the American University Washington, College of Lord Sam. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg

Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Plumber