Surveillance: Growth Trajectory With Rajappa

talking about high yields led by the United States. It's not still your care view going into next year. Absolutely. I mean, I think if you look at all the data we've been getting, whether it be on the employment front or retail sales, it's been gangbusters, right. So in that context, you should see as the US economy starts to reopen from business. Yes, people aren't getting into their business clothes and going into work, but it will happen

if eventually when infection rates start to come down. So there's a lot there's a decent amount of savings still left in the US to be spent. So I think that that should that sort of trajectory supports you know, pretty decent growth, not just into but also and beyond. So you're looking at a very strong trajectory for growth over the next several years. Yes, there are some rests on the inflation front, as well as on things like

oil prices, which might eat into consumer spending. But broadly speaking, I think the fundamentals are strong and that should lead to modestly higher years from here on the spar in another time and place, we were measured in our path to a restrictive monetary policy. How far away are we

measured or unmeasured from being restrictive. Well, Montrey policy is not restrictive at all right now right, I mean defense to purchasing assets, So to me, that's providing more accommodation, not taking away accommodation, even though they're going to start keepering asset purchases um and they have suggested that they're not going to be hiking rates you know, soon, at least not as of yet, even though the markets pricing in hike as early as as as the June meeting,

so the you know, for them to really move towards more tighter Montree policy, you're looking at sort of a pivot away from tapering at the pace that they are, as well as starting to move towards uh, you know, suggesting rate tax, both of which hasn't happened yet. But to build on what Tom was asking for, a key debate has been whether the market is underestimating how restrictive

FED policy could get. What's your view on this at a time when right now the market is is projecting a sub two target top rate, whereas some people are saying it should be three to four. Well, I think it's really hard to know what the terminal FED trans rate is going to be. I think the markets pricing in a very very aggressive start timing for rate tax as well as a piece of rate tax after the first rate hype, maybe starting as early as June of

next year. So I think it's really really hard to know what what the picture is going to be, like, you know, three or four years from now, and then say, oh, the termot fat funds rate has to be you know, four percent. I think we just don't have enough information. In fact, we don't even have enough information on what's going to happen in the next six months. I mean, most people think that inflation might persist well in the middle of next year now, but the fat doesn't is

not on board with that view. So I think that's just a lot of uncertainty. Sort of extrapolating into the terminal fat funds right now is just premature. How lonely will the federal Reserve be early next year? SAVANTRAA will

others join in? Do you think with this pivot? Well, first of all, we don't know if they are going to pivot, because I would say key takeaway from the f MC meeting minutes was that they do think that inflation is going to be transient and that it's going to come down by the second or third quarter of next year. They still believe that going to the December meeting or beyond, they're not really going to pivot period. So it really depends on, you know what they think.

The you know, the information is by the December meeting. We get one more CPI print before the December meeting, and that's that's why I think the December meetings will be very, very crucial, because you're going to get information on employment, which we already have a pretty strong dejectory for. We're also going to get like a third data point, if you will, before the December meeting, which should give them enough information if they want to to pivot. Will

other global central banks follow the US? Perhaps not. I think that global monetary policy is very asynchronous, and it's probably going to remain remain asynchronous whilst your next year and the year after. So every day over the past week or so, Sibat, we've gotten about a hundred different Fed officials I'm exaggerating speaking at different forums. What's your sense about anything, if anything we've learned that's new or moves the ball forward about how they're thinking about their

rate policy. You know, it was kind of disappointing that we heard quite a few fat speakers, but not really and in substantive or new from any of the speakers. I think some of the hawks has sort of doubled down. You're hearing from the likes of Bullet, who are saying that we should be thinking about balance sheet normalization right after tapering as of purchases. He has always been calling for a sooner taper and to taper as well as

you know, faster begin of beginning of rate heights. So it's all the same story from from the hawks, um and you're what you're hearing now more is the ex FED officials like the likes of Dudley and Lockhart, who are saying that the Fed should be thinking about normalizing policies sooner so that they don't sort of made so there's not a policy mistake, you know, by not raising greats soon. Do you listen to the former guys or the current wants Savantra from more accurate where you think

it's going the current ones. I think the former guys are more honest and open with their opinion. But that's just my few Sabantra. The former guys have have a lot of wisdom, right, so we can we can take away information from that, Savantra Jampa of Sock. What we do with your folks is we try to get lucky, and you get lucky in all different ways when you book quality people, which our team recently has been on fire. And they said, let's get Megan Green, senior fellow at

Harvard Kennedy School. But what you don't vote, no, folks is out of Princeton in Oxford. She was definitive on Europe and Turkey a good number of years ago, and we're thrilled Megan Green could join us at this moment. Is Turkey simply unravels on Lera. You know, Meg and I went back into the Great Internet and there it was EU Turkey. Something is rotten. You're an authority on this. How rotten is Air Tuan and Turkey right now? Yeah? I mean, I think the markets are really speaking for themselves.

It's not just Air to Wan, it's also the independence of the central banks, some or unorthodox policies. Um, you know, euro dollar bonds in Turkey. I think that the Turkey is at the front of the line for emerging market countries that have borrowed a ton to pay for this pandemic response. Uh, and that may not be able to service that debt as interest rates start rising. Accommodation is withdrawn globally. So Turkey is a real car canary in

the coal mine. Brazil is another one. But I think Turkey has been a real basket case for a long time and it's it's playing out in the markets. Now. Do you presume that Mr Arata Juan and the various Ara Tajuans from two thousand two under crisis of finance, will he turned to America or Europe? That's the big question. I think probably the US is actually more important Turkey makes no qualms about not really having any interest in

joining the EU. Now. Uh, there was a spat between Turkey and EU with a migrant crisis of course a number of years ago. Um, but the US is really what matters in terms of big financial flows, and so I think one will probably turn more towards the US than it will towards Turkey. I think it will have to turn towards the i m F as well, though Megan a Turkey is a very specific story with a

very novel perhaps approach to economic theory. When it comes to President are to Wan, there is a larger take here though, especially with the South African rand, which we're seeing also lose favor today as it raises rates, but perhaps not as much as people were hoping. Why is it that there is this feeling in emerging markets that they have to tighten rates, but they don't want to tighten rates quite as much as a lot of the

traders are expecting them and want them to. Look, a lot of emerging markets, both middle and low income countries, already had a debt problem before the pandemics started. Then they had to issue a lot of debt, of course, to pay for the pandemic response. So they don't really want to high rate so that much because they know that that will increase their borrowing costs. And it's all fine as long as liquidity is ample and borrowing costs

are low. But they learn from the LA STM debt crisis, and so a lot of that debt has been issued in local currency debt, and so central banks are a little bit reticent to high grades. It's also worth pointing out that in general, while fistful accommodation was really relaxed in most emerging markets are actually going ahead and engaging in a degree of austerity for three. And so if you have the fiscal engine pulling back and the monetary engine pulling back, it's going to make it much harder

for these countries to service their debt. And also that has couragesy implications that makes it harder for them to pay for imports. And so I think we're going to run into a lot of trouble in terms of a sovereign debt crisis and emerging markets. Maybe not this year, but I think from next year onwards. And and the I m F has beefed up their firepower to deal with this, but they don't necessarily have good programs for countries that kind of fall in the middle and and

need medium term help. And this goes really to Damien Sassaur's point, how the FED is banker to the world and they are looking not only at domestically what the policies need to be. But if they high rates twice, which is the consensus right now among traders at least that's what's priced it to the market, what would that do with that trigger the sovereign debt crisis that you're

talking about in the developing world. Yeah, we've seen in the past that has the FED high grades, borrowing costs everywhere else go up, and that's that's the case for the Eurozone, that's certainly case for emerging markets. And while uh IM sovereigns have been better about issuing in local currencies,

the private sector hasn't necessarily. Of course, it depends on which country we're speaking about, but a lot of that debt is issued in US dollars, and so as borrowing costs go up for the US, they rise everywhere else. But also their currency implications that make it harder for a lot of em countries to service that debt. Megan one of the things we're seeing in this season of outlooks of two thousand twenty two in market economics, which you did at Manual Life, is almost a lack of consensus.

We use the C word consensus, But the bottom line is everybody's all over the map right now. Is that unusual? So it's not unusual in a pandemic. None of us really know where the economy is going unless we can work out what's happening with the virus. So that's one massive piece of uncertainty. But remember we've never been through any of this before, and so while other economists and I can come out and say with a lot of confidence what we think will happen to something simple like inflation,

we actually just don't really know. There's a ton of uncertainty around the labor market. What does the labor force participation rate look like? That has big implications for whether the labor market is tight or actually has quite a lot of slack right now. That feeds on into what the Fed should do. Um, there's huge uncertainty around all of this, and these are the basic building blocks for

any kind of macro forecast. So it's unsurprising that economists are sort of all over the map meanwhile, so that'th The carpenter of More Can Stanley, on the show earlier said that if you start to see inflation peek out in the first quarter, as the FED is currently expecting, and then start to decelerate, that will be enough for the FED to remain on hold for the remainder for the duration of two and wait until the first quarter of high rates. Do you agree that it's not necessarily

the absolute level of inflation but the direction of travel. Yeah, I think that's probably right. Um. I also think that the FED has sort of promoted their mandate on full and inclusive employment and and that's a real priority for them in a way it hasn't always been. And so if we do see inflations start to decelerate next year, then I think that the FED will feel a lot

less pressure to withdraw accommodation. That being said, I don't actually think we're going to see inflation decelerate at the beginning of next year, and I'm I'm firmly in team Transitory on the inflation question, but I think the supplier disruptions that we're facing now will probably persist for at

least another year. And it requires not only an abatement in demand, but also it requires us to go back to buying services instead of goods, and and that will depend very much on the virus, so that can take a while. And then of course it also requires us addressing some of these supply chain disruptions. I think that could take quite a lot longer. But I do agree

with Seth. If we were to see weaker inflation, the FED would be under much less pressure to hike rates, and I think we could well end up waiting until to see rate hikes, and I think that would be the right call actually, even if we don't see an abatement and inflation early next year. Interesting in line with Morgan Stanley and t D for that, Madam Megan, thank you, Mcan Grayen if they crawl institute and how the Kennedy

School out of London this morning. Another one of the great dual degrees in America, as you take French at William and Mary and attach it to something else. Seth Carpenter did that. Were there French and Francophone studies program which is worldwide acclaimed And we're thrilled that the gentleman from Paris could join us today and John Faroll. I think, you know, if if down at the Fed, John help me, but they speak Greek, maybe Seth can pick up on that.

Maybe the French would help on the resume along with working at the FED, working at the Treasury. Set Some people are saying it, and I asked this very delicately. Mr Gorman is watching. Would you be interested, Seth in the role that people are talking about connecting you with down at the Federal Reserve? Uh? You know, I always blush a little bit when I hear those stories. I

don't personally have any information about that. If you do, you know, Seth, maybe they like the idea of the call you've got for next year on the Federal Reserve, no hike. In fact, you're going for Q one three. Let's start there, hy Q one, Seth? Why not next year? I think that's a great question. And you know, when I think about Ellen Zentner, who's a great economist in her US team, the call on the FED really is

the derivative of the call on the US economy. So the forecast for inflation, which is obviously top of mind for everyone, is that inflation is going to peak somewhere around the beginning of the and then start to come down over the course of two And I'm looking at a few things. You were talking at the at the top of the segment about oil prices and if there's

going to be a reserve release there. I don't have a strong call, but looking at futures where somewhere at or close to the peak, if you don't have oil prices going up anymore, that inflationary pressure starts to fade away. Similarly, supply chains. Our equity analysts from Asia have talked about

the semiconductor shortage coming to an end. So as things start to normalize, probably over the course of the entire year, but as things start to to normalize with supply uh an oil prices stopped rising, then we we we have a forecast for inflation coming down. Listen to what your Powell said at the last press conference. He said he expects inflation to fall, but not until Q two or

Q three. So if we're right and inflation does fall and maybe even starts in the first quarter of the year, that's going to give them a bit more breathing room relative to what I think a lot of the markets looking at. And then other part of their mandate employment. We've got a forecast for the labor fourth participation rate, especially for prime age workers, to do what it does

in every expansion, which is to rise. It's already's been doing that over the past several months on net and if that continues, then they get to reconsider those two conditions for a rate lift off. What's going on with inflation and what's going on with pect So seth normalizing, though is not normal. As you pointed out, the idea of the inflation rate peeking and then coming down still does not leave us with a comfortable inflation rate for the Fed to just completely do nothing other than follow

it's relatively slow taper. What gives you confidence that they will be able to push back against the Bill Dudley's of the world, who are saying, guys, you're so far behind the curve and you are risking a huge policy error. I mean, I think it's got to be very strong and very lively debate, and so you know, it's being at this desk and trying to think about what's likely to happen. I have to go back to Powell's words. He said he doesn't expect inflation to materially fall until

Q two or Q three. That to me sounds like let's let the taper run its course and then after that start to think about when, when when to talk about rate hikes south I look at all this in the debate that we framed on Bloomberg surveillance over the last couple of days. Our listeners are viewers, their seats are spinning over fancy guys like you, over what's the key determinant in the fear of inflation and that this

is the Bloomberg business we cover talks about. And I'm gonna ask you this as clearly as I can Kelli Look coefficient critique, what is the what is the Kelly Look coefficient critique? See I who play Kelly Look efficient critique very very well, then, tom Um, I think there is a massive disconnect between the way that macro economists talk about inflation and the way that everyday real people talk about inflation. People who are in the course of

their everyday life are not running regret sans. They're not sort of scanning the data to see what's going on. They're paying attention to how much money they're paying to fill up their gas tank. They're paying attention to how much money they're paying at the grocery store when they buy food. It seems entirely reasonable for the average person to be to be feeling the high prices that are going on here, and I think they're in lies a

real big communication challenge. I think, uh, that communication challenge might actually get compounded over time because the Fed very intentionally has set a target for pc inflation. Markets in general look at CPI inflation. They're measured differently. There are

conceptual differences between them. The gap between those two can actually get much larger over the course of the year, and so there's a real challenge there translating inflation as macroeconomists who are studying central banks think about it, versus inflation and what it costs for it every for everyday activities for regular people. Seth, do you promise to come back? Promise? I would like to come back every time I'm invited. Yeah, but he can't come back within the window. He can't

come back within the window. And that's on the black camp period. Want to hear from the run thank you for promising to come back, Seth. Convient to that from Marcin Stanley, Let's pick it up. We've got some wonderful guest today on economics, and we go to someone incredibly skilled here on market economics. Stephen Stanley is with the amorous peer part in their chief economist and is really

good at the granularity. Steve Stanley, I want you to extrapolate the reality of John Deer and as Greg Velier reports this morning, ten percent inflate a wage lift, and then the next year of five percent in wage lift, and the year after that of five percent wage lift. That smells like inflation to me. Can the union inflation fall over to non union America? Well? Absolutely, I mean the labor market is incredibly tight right now, and I

think workers realize that they have the leverage. And so you're not only saying it with some of these strike actions, but also UM people sitting out waiting until they get an offer that they that they liked. So yeah, I mean I think workers right now have the um you know, have the leverage, and they're gonna push it. You know.

I look at Target in Amazon together bordering up on two million employees, and I would suggest that the margin those are almost union like employers just because of their mass, almost general motors of nineteen thirty five or nineteen fifty five as well. Are we more organized than we think we are in our labor markets? That's an interesting question.

I mean, I think in some aspects that's probably true. Um, these big companies are big employers, I should say, have definitely, you know, responded with kind of big moves in terms of wages, raising the minimum ways that they pay or the average wage that they pay, in a manner that is somewhat akin to a collective bargaining type situation. Um. You know, maybe on some other parameters, whether it's you know, working conditions or other collective bargaining type issues, you know,

maybe not so much so. It's maybe it's a bit of a hybrid. Stephen. Does the FED have time to wait for this labor market to hail, to get back to where we were before this pandemic. The FED is way behind the curve right now. I mean, the fact that we're still buying assets is you know, it's just it's a problem. And so they're gonna, I think they're gonna end up moving quite a bit faster than they think they're gonna. At some point they're gonna have to

accelerate the pace of tapering. UM. And I think we are going to get rate hikes next year, um, but it's gonna take a while for the FED to catch up. I mean they are definitely and they look they wanted to be behind the curve to some degree. I mean, this is what the new framework stipulates. So we're getting kind of a great experiment. Um. But the world looks very different than the way we thought at looked in two thousand two nineteen when the FED developed this new framework.

Let's talk about how much its changed as things stand. That que program is set to run down by the middle of next year. Run me through when you think that set to end, and when the next right high cactually comes after that? Sure, so I think by early next year, assuming that the inflation numbers continue to uh to be very firm, which I expect, um that they will have to accelerate the pace of tapering. So as you said, if they just maintain the current pace, they

would be done by June. I think they'll probably finish March or April something like that, and then I have the first rate hike pencylvan for June. Um, you know, with a couple more before the end of the year. Stephen, what's the trigger for them to move to a more hawkish framework as you're talking about, well, I think you know clearly the inflation numbers are going to be propelling them forward. And I think on top of that, we

are seeing UM good progress in the labor market. And I think the shoe that is left to drop in terms of the labor market is labor force participation. And people have been kind of waiting. You know, there was the end of the unemployment benefits UM, the beginning of school, the UM, you know, calming down a bit of the pandemic. So there are a number of events that people were waiting for in the fall that they thought might change

the equation for labor force participation. And then the next few months are going to be really key on that. I think either we're gonna get a big influx of people back into the job market, and those people are mostly going to find work very quickly given the number of job openings and how desperate firms are to staff up. Or we're gonna find that people are hanging back UM for longer than than expected, in which case the labor

market just remains tight. I think in either case, UM, the FETT is going to have to conclude that the you know, the work is mostly done on the labor market. I think we're gonna be at something approximating full employment UM by next spring, which becomes really the main debate that I see into next year, which is what is the terminal policy rate, that is approp rate for the new economy, the post pandemic reality that we're looking at.

And we heard from Bill Dudley of the New York formerly of the New York Fed, who said he thinks it could be three to four percent, that this is something more persistent when it comes to inflation and longer lasting. Do you agree that the Fed is not only going to hike more aggressively, but has a much higher target to hit to normalize this economy. Yeah, funny you should bring that up. That's something I'm actually writing about right now.

I've got something in the works on that. I think if you look at the adjustment that has been made in the markets over the last several months, there's been a big adjustment in terms of the data liftoff and what happens at the beginning of the rate cycle. But if you look further out um at various money market futures, what you see is that the markets still expect the FED to end this cycle below two percent, and so I think that is potentially the next shoe to drop.

If we start to see rate heights UH next year, in the second half of next year, and inflation is still running well above the FEDS target, people are going to start to think a little bit more seriously about that scenario that that Bill Dudley and others have laid out.

Um And I think, you know, if the FED says that neutral is two and a half and inflation is already running well above target and it doesn't come all the way back the way that a lot of FED officials think, then you know, I think that's the point at which people are going to start to wonder, well, hey, maybe we are going to have to move into restrictive territory. Steve, The equation is why will CE plus I plus G as in government plus something to do with there on

net exports? On the back end, the people pushing against your view say government will slow down, that the fiscal drag will be tangible as well. Discuss that. Do you buy it? Um? I think it depends on how you define fiscal policy. So if you define a fiscal policy by what passes then that would be true. Um, but I'm not sure that's the right way to look at it. The way I would look at it is all of the fiscal our jests that we've seen over the past eighteen or so months, um for the most part, is

sitting on household balance sheets. Still. Uh, it was all saved. You know. Household balance sheets show excess savings relative to pre pandemic levels in the neighborhood of three trillions. So most of those rebate checks and unemployment benefits and all the rest are still waiting to be spent. Now, it won't all be spent at once, but I do think that fiscal policy in that sense is going to be continuing um to provide a table into growth in Statemen.

This was really interesting. Thank you, sir Stamens Downey. That about. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best and 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 In. This is Bloomberg