Surveillance: Fed Surprises With Dudley

And two thousand twenty one for William Dudley has really done something in former New York Fed President, and we are honored that he's been writing and writing a series of intelligent essays, controversial essays for Bloomberg Opinion. Bill Dudley. It it's not my chart of the year, but if I take log tenure yield and Stan Fisher has always been great about the percentage change moving yield, if we get the Dudley yield moves, these are huge percentage change

shocks of this low base. Is that important? I would argue that the presented change obviously is going to be more elevated when you're very close to zero. So I think it's really the magnitude of the move rather than the percentage change that's really important. If the Fed boot raises short term rates to one and a half or two and al percent, that's still very low and environment where inflation is running above. Bill, help us ound with

the playbook for next week. The extra surprise, the additional surprise, the essence of your pace this morning. Do you expect to see in the summary of economic projections beyond the forecast into the dot plow? What are you looking for? Bill? Well, the Fed is obviously changing their view on what's the appropriate monetary policy. I mean, this is a pretty remarkable meeting. After announcing the taper, they're going to accelerate the taper.

So that's an admission that the Fed Reserve was wrong and as a as as part of that process, they're gonna have to revise their economic forecast, and I'll be summarizing the summary of economic projections. I think you're going to see is higher inflation, for a tighter labor market, and most importantly, much more tightening from the Fed in the forecast rising, which extends from last time the Fed meeting forecast for federal fundrate was one cent. That's below

what the Fed fuses neutral. This time, I think they're gonna at least get to neutral by the end of So you're gonna get earlier rate hikes and more rate hikes within their forecast. What's the significance of that, just in terms of how quick this cycle will be bill how short it might be. Well, I think it really all depends on how financial markets react to that. I mean, right, so far, people have been very comfortable with the Fed

beginning to remove mon entary policy accommodation. You see a tenure treasury yields are still a very local and one and a half percent. You see the stock market within a you know, a whisker of its all time high. So it really depends on how financial markets react to the FIT tightening. I think there is a prospect for a bit of a surprise, a bit of discomfort by market. I think the feder reserve is going to do more

than what's currently priced in. You look at you're at the futures market, people are saying that the peak and the Federal fundrate and the cycle is only going about me about one and a half cent. That's well below what the Fed and selves deem as neutral and well below what the FIT is likely to write down next week. But when you talk about the financial markets reaction, I think of the yield curve and how it's been flattening some people saying that it indicates a market expectation for

a policy error. Should the Fed high rates as much as three times next year, which you think probably should be a base case scenario. What's your read on the leield curve. Well, I'm not really sure why the yield curs are doing what it's doing. I mean, one possibility is that the quantitative easy in the fifth purchases of assets are just pushing down long term yields if people don't want to hold deposits of commercial banks in their searching searching out higher yielding assets. So we may have

a bit of a bond bubble just caused by quantitative easing. Obviously, as the quantity of easing process is run down, and I would imagine bonnyels will will retreat to a more normal I do think the tenure treasure yield at one percent environment where inflation is running five or six percent is very hard to explain in the current circumstances, Bill, can you elaborate a bond bubble from quantitative easing? What that means in terms of the threshold of when people

reap price bond yields. According to the Fed backing away from some of their purchases. Well, I think the you know it's gonna it could take a wild for this to playoff, because remember, the Fed is still adding to his balance sheet even as we speak, and the taper it won't be finished until the March flone C meeting, and even after that will be quite a bit of time before the Fed Reserve begins to shrink their balance sheet.

Only after they've lifted off and raised short term interest rates to say one to two percent, will start to shrink or balance sheet. So the effects of quantitative easy and could linger for quite some time. I do think the bond market is going to be uh disturbed by the fact that the peak and the Federal funds raise is likely to be quite a bit higher than was priced, and that in a self a way, I think I'm bondus, but I want to get all stuff in open on you.

Are we practicing monetary theory? Are we practicing modern monetary theory? I need to get you in trouble this morning. Help me here are we doing it? I don't think. I don't think so in the sense that I don't think the Center Reserve is just saying whatever you want to do on the cystal side, We're going to monetize that debt. It feels like that a little bit because of the

quantitative easing program. But remember the quantitative easing program was undertaken because short term interest rates were at zero and that the said wanted to add monetary accommodation. The only way they could do it was by this these other means. So I think we're you know, it's more resembling monitor monetary theory than what we've done in the past, But I don't think we're quite there yet. They were lucky

to have you with us this morning. Just fantastic, and so far this year you've been right in more ways than one. Built Downtly there be former New York Fed president and Bloomberg opinion columnist. Let's talk about this market with Ding kind of founder and CEO of Macro Risk Advices, Dan, your words, risk free asset, the bedrock of financial markets looks unwell, Dean, what do you mean by that? I

would actually say it's um displaying signs of chaos. Um. You know, if you look at we all studied the VIX, and the VIX was on the move up down, traveled quite a bit this last week. UM, but so many, so much of this whole risk equation, it's priced off the risk free asset class. And I would just argue that, um, it's really not risk free. It might be from a regulatory standpoint or for how pension funds allocate to risk,

how they think about their portfolios. But here's an asset class that number one is moving around, it's on, it's displaying a lot of volatility UM, and it's fundamentals are going through a regime shift that is deteriorating. UM. You know, if we think about a default in the typical sense of a credit bearing bond, uh inflation is effectively a default of creeping default for a risk free security. And that really what we're seeing, right that the bedrock of

everything is rooting in terms of its fundamental outlook. And you know, when I step back and I look at this, this shot heard around the world the last week, the four percent draw down, which was in a lot of ways so meaningful because it encapsulated so many asset classes. Crude, yeah, cryptocurrency so much. You know, underneath the surface of it is a risk free market that's displaying a lot of fertility. And I just think it's something we have to pay

a lot of attention to. We've seen the Vix come in UH dean constructively come in thirteen big figures. Most of us have a collective memory of nirvana of the Vix of A twelve, thirteen, A fourteen. Where's the new nirvana right now for the Vix? Is it a twenty level? Well? I think that you can argue that the floor has gone up a little bit. Um, you know, I like to say, especially these days markets and especially Volatila with with beam stocks and so forth, it's a never say

never business. What you thought was achievable, both to the high side and the low side, um, just don't count on it. But that I would say that the floor has probably moved up from perhaps sixteen to eighteen. I think this last UH spasm in markets was was pretty meaningful, especially relative to the slight the modest degree of draw down. There was a lot of trepidation, and I think the trepidation comes from the sense that we almost got hit

on two fronts at once. One the growth shock, which I think the markets working its way past perhaps omicrons not what we thought it was going to be. But second, and you guys alluded to it. We we get this inflation data on Friday. This is an ongoing, UH source of uncertainty for markets, and you know, it's potentially very disruptive. Again, the FED fighting inflation from above is just worlds apart from the FED fighting inflation from below, which it's really

done for the entirety of the the post crisis period. Dean, There's a consensus emerging in markets that the more inflation data runs hot now and the more near term inflation expectations rise, the lower they go over the long term. And this is the flattening yield curve, and this is in the inflation expectations. Do you think that that is wrong? Do you think that anything in the near term data could shake that consensus. That's a really great and open question.

And you know, as we look at the yold curve flattening this year, UH, it's very different from let's say, the flattening in two thousand seventeen, which was extremely low VIX environment a nine or ten VIS and a move index the rate volatility VIX that hovered an all time lows as well. This is much different. This is this is tightening because you have to versus twenty seven team, which is tightening because you can to the curve and

especially the back end. Well, I'm just not convinced that as we tighten and if the FED gets off zero, it completes the taper and starts to initiate urns of tightening. I'm not even sure that packing goes up. And I think this will ultimately scare the FED quite a bit um as it did in late eighteen early nineteen, and so you just have to wonder how far we're going to get in the tightening cycle. Um, I just don't see it ultimately impounding itself into the long end of

the curve. Being ready thoughtful stuff as always, brilliant. Love catching up with Dinka at Macro Risk Advices, joining us now by chance. Gig Gronville, Senior Scholar, JOHNS. Hopkins Center for Health Security, g G. One of the important points in the now beginning three year ordeal of your profession this pandemic. What is the significance of the FISER announcement. Yeah, this is based on one study and there are going

to be many more over the coming weeks. That shows that even though there is a significant degradation of vaccine um, potential vaccine efficacy from in response to Amicon that there is for some protection. It's not a complete escape, and so it's going to likely be boosted by having a booster, by having a third dose. The Prime Minister will be grilled this morning in one part of that in the United Kingdom, and I would auditorialize it. It seems to be a lot more chaotic over here than even the

gentle chaos of America is. On vaccine passports, in the vaccine restrictions of the unvaccinated, I should say in Germany, does that work? The vaccine passports work? I think they anything that can boost vaccine uptake get people vaccinated. We still don't know whether to doses is going to be enough to prevent severe disease um keep people out of the hospital. Maybe it will be enough to prevent even

less severe disease. We just don't know yet. We were going to have to see for what real world data is like. But yes, I mean anything that can get people to h to get vaccinated, I'm for as honest. They have a choice to not get vaccinated, even if it's eight inconvenient. This Fighter and BioNTech News really highlights the sort of controversy around boosters and the possible need

to continue distributing them. A lot of disagreement even among medical professionals about the importance for healthy individuals to get boosters. Do you think that data like this actually edifies the case for requiring this as yet another course in the normal course of action with vaccines? Yeah, I mean, we'll have to see what there's going to be more data that's coming, But it does indicate that getting that third dose might be much more important than just a nice

to have. It might be quite necessary for certain groups in particular, UM, people who are more vulnerable to covid um even before you know, older people, people who are compromised UM. So it might be, uh, it might be something that is becomes part of the vaccine. It's just

a three dose vaccine. Dr Runville. Do you expect a time when we're always just getting shot up with different vaccines to try to adjust to the different variants The idea that we're going to be getting vaccinated as frequently as we have been over the past couple of years. We will have to see. I mean, in general, there is no disease that's good to get UM. So I think it would be nice to have more vaccines for other things that we suffer from. But um, but we'll

have to see. I hope that we can vaccinate more people in the world and we can stop this, uh, this this variant sequence. And John with Amadanzo yesterday is he reviewed It was a wonderful professional review of the efficacy of the booster. You wonder if that changes with this announcement. Yeah, it's worth pointing out though, Tom, what we're talking about almost exclusively its vaccine escape and jj that was only one question of three questions that we

want to answer it. How contagious was this variant? How severe was this variant? Aside from whether it escapes the vaccines or not. What have we learned about that? J j UM. There are some indications that are positive that it might be less severe. But I think we really need to hold off and see, Um, we have a from population that has a different vaccination coverage in this in this country, we have a different spread of delta

in this country. I think it's best to wait for some more data before saying, oh, it's a mild a mild variant, because I think some people are saying that and we just don't have enough information to say that yet don't do. We appreciate your insight as always. What timely? What a timely conversation as well? G. G. Gronville. There of Johns Hopkins, the most well known west Ham supporter in the city of London, now with Hong Kong and now in the city of London. Briefly Steve Major, Global

head of Fixed Income Research at HSBC. Steve, as part of the exchange to get you to talk about bonds, I promised we'll talk about west Ham. Do you want to start there? What a performance this season? All that matters is that we're above Arsenal and Tottenham. Hopefully it'll be Chelsea as well soon beat and Chausa. Over the weekend, Steve, where's this coming from? How much money if that to

spend to do this? I was trying to explain it to Tom over the weekend that this is a West London club Chausea with a ton of money going up against an East London club west Ham with less money. How are they getting this done? There's hard work, good organization, They've they've signed some good players. Um, it's not just about buying the best players in the world, because as you can see at PS g and at Man United. It doesn't work. You have to have a structure and

a method of framework, like forecasting bonds. Well, it's forecast bonds right now on tens year and that's the call one fifty year and next year, then this move, this quired pass towards one percent, the bit of a tweak in the last week or so. Just run us through it. Yeah. The thing about the forecast, John, And as you know, it's a it's a point testament. It's a thankless task. I mean successful forecasting. It's like the Kinzie and Beauty contest.

You're actually trying to forecast what everybody else is thinking. So what I think personally doesn't matter that much. Is it's whether I can correctly estimate what everybody else is thinking at that point in time. And we've only got one number to play with. So so for us, one fifty for the ten year treasury is reasonable going into next year because that there's now a floor for rates, because the Fed has this hawk ish bias, and that it's possible that they're going to hike. We've got forecasts

for rate hikes. I'll believe each hike when I see it, and that's been my view through throughout this UM. So the one percent call, we've pushed it into two thousand and twenty three because we think that if and when they start to hike, they won't get very far. And we're not in the business of forecasting policy errors. If it's so obvious that rates would be hiked and then cut afterwards, the central brank will presumably just not do

very much. So so so to me, it's it's really really difficult to believe that rates are going to get anywhere near the levels reached in the last cycle. And when you look at the terminal rate like that, it's probably going to have a one handle. And that's why one in the longer run is more like the fair value your treasurers. I would love to have dinner Steve with you and Bill Dudley, a former FED president of

the New York Office of the Federal Reserve. He has been talking about how the end rate for the FED could be three or four percent based on how hot the economy is, based on how high inflation has been and will likely be. What would you say to him, Well, I get very few invitations, Lisa, so thanks very much. Next week or the week after that, it would be

interesting to know the basis of that. And look, we have to respect his opinion, but that it would be interesting to see how we get to three or four And has this calculation included the sensitivity of the economy to the amount of debt, and has it included global factors about the to see direction in China or Europe and Japan. I mean, does anybody watching this at the moment think that China is going to height rates or

or the ECB or Bank of Japan. So so presumably we need to incorporate the longer term structural variables like the debt overhangs, demographics, distribution of wealth, technology, and we need to think globally and once we've done that, and I'd like to hear how it's possible to get to three or four percent, because on our reckoning, that's going

to be very difficult. Some people say this time is slightly different, stive because of the money that was basically printed by so many economies by the fact that people got checks directly they are spending those checks, and you're seeing the consumer spending component of the economy absolutely surged, certainly in the United States. Why is that not enough given where inflation is given the read that we're expected on Friday, given wages to get us over the hump

of the demographics that you speak. Yeah, So, first of all, I think there's some double counting on these money supply estimates. A lot of the money that has been created through the que is anyway stuck in banks. It exists as reserves, So it depends on your definition of money supply. I don't think it's gone up. Actually depends on how you measure it. The other thing is the fiscal impulse of two thousand and twenty one goes into reverse in two

thousand and twenty two. So a rational expectations view of all of this would say, let's be careful. This isn't free money. Someone has to pay for it. The the the U. S Government has has effectively borrowed from the children to pay their parents. And if anyone thinks that's clever, then then fine. But I don't get it. Um it was a huge bridge to tomorrow, but it doesn't look very stimulant. It's not gonna be stimulative when we get

into two thousand two. Steve Major Deutsche Bank frames out through George Sarah Ellis and their FX desk not a curve in version, but a possibility of one. Do you have a scenario call where two year goes out and goes a above the one fifty level on your tenure call. Yeah. Part of the reason for our recent forecast was because the two year treasury one year forward was trading at one twenty at the end of last week, and so the forwards have got a lot of cover for those

great hikes. And in fact, in the forwards there is an inversion already if you go out to ten year plus. If you go one year two year forward for the tense thirties you get you can see an inversion if you if you look at a chart for the last thirty or forty years, inversions only happened two or three times, so so so to me, I'd be fading that move.

And what we've been doing is looking at steepeners in the ultralong segment and you get paid in terms of carry and roll, and that they have they haven't gone wrong in the last few weeks, so that they've actually been holding steady. So so I think fading the inversion is important, um. And we have to look at the forwards.

As I say that two year rate is already pretty high in the forwards, and we had hawkish surprise in June followed by by a big hawkish surprise in September, and next week some people are calling for an even bigger hawkish surprise. I say, once bitten twice shy okay. So this is really important, Steve Major, as we go into the sophistication of your market, which is to look to the future. If you were having a cup of coffee this morning with Jerome Powell, how do you explain

the forwards to him to frame his press conference December? Well, he gets it, and I guess um he also gets the Maradonna effect, so he could he could talk to the Bank of England governor, the current one and the previous ones to talk about that. The Maradonna effect to non football fans is using your credibility to drive the expectations, maybe maybe getting a hawkish just when inflation is about to crash around there is is a way of tightening

policy and meaning they haven't got to hype very much. John, who's Maradonna? Oh? Tom, No, No, I can't even pretend you mean that you're not serious? Will come on, diego Maradonna. Jason is one of the best football players in history. Tom, come on, and what Steve means by that is Diego Maradonna would faint left, faint right, drop the shoulder left,

dropped the shoulder right. Tom, look like he's going to go one way, look like he's going to go the other, but ultimately just go straightforward, which is when we talk about Bank of England the Maradonna effect, it's the Bank of Engness suggesting they might do one thing or the other then ultimately do nothing. Steve, good luck at the weekend. Fantastic to have you back in town. London's I just love it, Steve. Thank you, sir. HSPC to you, sir,

thank you very much. It is not all gloom. We saw that from JP Morgan today with the forty five page outlook. Adamant about recovery, adamant about a normal lozation, someone that understands this. As a president and chief executive officer of Hilton Chris n. Seta on the recovery, I have no real worries. I mean, every time, you know, we've sort of as we've been recovering. If you look at you know, the minute people start to feel like we're through the crisis. The demand for meetings and events,

which is the longest lead, skyrockets. People are, people are dying to get out. Christian has set out of the uv A combine. They're talking, of course, peer to peer with David Rubinstein and an operating officer within this pandemic, David, I think about a moment I had with Jonathan Tish of Lowe's earlier this year of maintaining optimism in travel in a hotel. What did you learn about the trench

warfare of this pandemic from Mr Minnesota. Well, obviously the hotel industry suffered enormously, as did the entire lodging industry and the travel industry, the cruise industry, but they're coming back. What's coming back more rapidly is is recreational kind of

or vacation related travel. Business travel is not coming back as quickly, in part because business people have learned they can do a lot on zoom, so they're hopeful that will come back, but hasn't yet come back to the same extent that vacation of leisure travel has come back. Are you suggesting within the grind and the many many people under you at Carlisle, David Rubinstein is going to

do your acclaim transactions by Zoom. Well, there's no doubt that the private equity world has done a lot through Zoom over the past year and a half. Clearly a lot of people are beginning to travel again. I've traveled a fair bit in recent uh weeks or so, but clearly it's just not coming back at the level that it was before, and it'll take some time. But the lodging industry has done reasonably well in terms of its

stock performance. The stock performance at the height of the pandemic, we're all time lows for the travel industry and the lodging industry. Now they've come back to near record highs in terms of their stock. So the market is anticipating that they will see travel coming back. How much is Christmas said of the Hilton president CEO anticipating the business travel will resume in the same kind of way and putting money behind it by making acquisitions and some of

the more beaten up areas in larger cities, in convention centers. Well, what they do is remember the way Hilton. Hilton is the second biggest hotel operator, married is the biggest. They have thousands of hotels mostly they operate them um for other people that are owners, and a lot of it is franchise operations. They take a fee or some kind of royalty on on the name Hilton. But it's coming

back reasonably well. They are making some investments to get hotels back, but the biggest problem they have right now is getting a labor to come back. Remember, a lot of people lost their jobs, a lot of people were laid off, and now they have to get these people back. As hotels are coming back, more people, more and more people coming back to stay at the hotels, you have to get workers. And a lot of workers are not coming back. They don't like those jobs, or are they are.

They're taking other times of jobs. So it's a real labor problem. And to some extent, the prices are going up in hotels because you've got to pay for higher price labor than you did before. In hotels are trying to figure out what they can cut, whether it's perhaps not changing the towels, is for as many nights or other areas that they can basically reduce costs in order to have fewer employees and to keep costs lower for consumers.

Where are some of the areas that are costs are getting streamlined that you talked about with the president with the head of Hilton, Well, if you're staying at a top line hotel, one of their Wall Door for Story of hotels, or one of their their real um more luxurious hotels, you're gonna get all the services you had before,

because people are paying very high prices for that. But if you're staying at their lower grade hotels, the ones where you can get by and maybe a hundred fifty dollars a night, you may not get daily towel service, you may not get the free breakfast that you've had before, and room service has probably been cut back of not a liminated in some of those hotels. So it's it's really the lower grade you're not getting the services back yet.

That will come back in time, but they're experimenting maybe people don't really need hotel uh services they had before. Maybe the things will be different, But right now the hotel in issue is coming back. It's stock performance is in really really good shape, but the bottom line is still i would say below where it was at the peak before the pandemic. David, one more question, and of course this is perhaps my last question. Do you have

two thousand twenty one. I want you to look in the next year and as you look at the D conglomeration for different reasons of General Electric, of Toshiba, UH and a few others out there as well. What is your tone on combinations or D combinations for two thousand twenty two. Well, I think you're going to see a lot of acquisitions, but I think conglomerate type acquisitions are

probably not going to be in favor. The many large companies are de conglomerating, as you know, and people are trying therefore to how companies focus on one or two areas of expertise. But I do think that interest rates will be a little bit higher next year, but not so high that to deter people from making acquisitions. The acquisitions industry is still pretty strong right now. David Rubinstein, thank you so much for joining us. Peer to peer

just very, very strong this year. Look for Peer to Peer with David Rubinstein nine pm in New York with the chief executive Officer of Hilton. 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 One.