Surveillance: Inflation Persistence with Dudley (Podcast)

on what has happened. I'm not going to mince words, Bill Dudley. This is one inflation report but important and you highlight are jarring disconnect? How disconnected are we right now from where we need to go? I think the problem is that the Fed Reserve has not been forceful enough and stating not just what their goal is supercent inflation,

but the means to achieve that goal. A chair Pole in his press conference last week didn't really want to talk about why Monterrey policy might actually not just have to go to neutral, it might have to go to type. And I think a type Monterrey policy is what's going to be required to get inflation under control. Why are they timid. It's not clear to me. Uh, they're not timid. Certainly they're not timid about talking about what the end

goal is. But to me, if you're if you're talking about the end goal to percent inflation, you've gotta also subscribe how you're actually gonna get there. And if if you start to sugarcoat it, then financial conditions don't tighten as much, and you also run the risk that people will lose confidence in the federals are. One thing that's actually in the FED favor up to now is people still are confident in the Federals Erve is going to

do his job. But if you keep under promising you know what you're gonna you know what's required, then I think there is a risk to the FED credibility down the road. Bill. Do you think that this really is sugarcoating or do you think that FED Chair J. Powell just does not believe that we're going to get a more persistent level of inflation that many people, including yourself are talking about. Well, I think you can see it

also in the own projection economic projections. For example, after the March eff Once meeting, the published the Summary of Economic Projections and what they showed was infliction was just magically melting away despite the Monterrey policy that didn't really get to tight, and despite the fact that the unemployer rate did not rise, that the bondemplary was still projecting b around three and a half percent. So that's sort of a magical, immaculate disinflation. And I just don't think

that's how it works. The Reserve has to tighten, moject policy sufficiently, just still get coming down to push the unemployer right up. That's what's required, and I think the feder Reserves should be more forthright about explaining that to the American public. Do you think that Andrew Bailey over at the Bank of England really basically charted the path for FED officials saying, Look, we're going to be hiking

rates into a slowing economy. We might just exacerbate a recession, but a near term recession will be what's necessary to bring supply and demand more into balance to actually create it more growth later on. I don't think that that necessarily has to say that they're going there's going to be every session in the fetch still shoot for a soft lanning, but I think they should explain that soft lanning is very difficult to achieve when you have to

push up the unemployer rate to hold down inflation. Bill from where you sit, and of course decades with Goldman Sachs and the grind of this with Ed mcclvey, and also all of your academics as well. I think our audience is fascinated by what politicians can do. And if we stretch in our recent memory from lb J to Jimmy Carter to Richard Nixon, who has handed that from Carter and onto the present president, what do presidents do

about inflation? Are they even part of the discussion. Well, I think the public has an exaggerated view about what any administration can you do about inflation. By administration, probably the most important thing they've done is the soil from the Strategic Patrolling Reserve, and that's probably putting some downward pressure on oil prices relative to what they otherwise be. But I think the reality is the president's ability to

do something about inflation is extremely limited. Really, the only thing that the president can do is get to Congress to tighten fiscal policy, to make the fens job a little bit more easy. On radio and television, truly an historic moment and particularly the inflation adjusted real wage where it is. William Dudley is with us. He's a former New York Fed president. He has been shocking in his pressions. Uh nature of guessing forward on where this price change

is going. If you're just uh, we're just joining us. We're getting used to eight percent inflation. Ira Jersey scheduled to be with us, are waiting to get Mr Jersey lined up on a bond market with a two year yield higher by nine basis points. And Michael McKee doing what he does best, which you speak to people like President Dudley and also goes through the minutia and the data. Michael McKee, what does this report say about wage growth

in the fear of a wage spiral? Uh, it doesn't give us a whole lot of new information because the real average hourly earnings, which they calculate by subtracting inflation from where people were, are down two point six same as last month. So no change there. We're still behind inflation.

I've talked to a number of Fed officials in the last few days about whether companies are telling them that they are seeing a wage price spiral and they're seeing prices continue to go up, but they don't feel like they have enormous pressure on them yet to raise prices. And then Bill Donald to go to you on this question. I see the wage growth, but I also see the lack of wage growth over the last fifteen years or so. Is our fear of a wage spiral different now than

it was decades ago? I think there has to be some fear of it. Given the tightness of the lander market. You have one point nine until jobs for every unemployed worker. That's an all time record. So the laber market has really never been this type and the consequence of that should be higher wages. Higher wages should also be the consequence of headline inflation running persistently above what wages are

actually doing today. So I think the risk is that wages what you're trending about five and a percent year a year, go higher. Do you agree Bill with Chris Waller who came out yesterday and said that there's so much froth in the labor market that we could actually withstand a softening there that would be more beneficial rather than detrimental, even if it led to less opportunity fewer opportunities. Well,

I think that's what they have to do. I mean, I think they're trying to also, you know, sugarcoat this a little bit too. We can basically reduce the demand for labor without increasing unemployment, so it will be fewer jobs available, but don't worry, you'll get a job because there'll still be enough for you. I think that's again sugarcoating. You know how easy is going to be. I think at the end of the day, they have to push the downiform rate up, and that's going to be painful. Bill.

When we talk about the drivers of inflation, it's one thing for the FED to respond to a labor market that's hot, two rents that are going up. It's another thing to respond to supply chains that are disrupted and a shortage of goods that ensues they're in Do you think that it doesn't really matter that the FED has to reduce demand and that is the only tool that they have in order to prevent inflation from becoming entrenched

in the psyches of Americans. Well, the end of the day, that's job is to make sure that demand and supply are aligned. Now, the supply shock is very temporary. The FED can look through it because it knows that supply is going to increase in the future, but the supply shock, you know, last for a long time, which seems to

be the case currently. Then the fact that it's due to supply chain disruption, that doesn't really matter, because if those supply chain disruptions are persistent, then you're gonna have an inflation consequence bill. Just real quick here, You're talking earlier about a FED funds rate in order to be truly restrictive. Have you changed your view on how high the FED will have to go? Well, I think it's

four to five or higher. Um, you know, I was three or four maybe six months to go on four to five and shocked me if I'm you know, five to six a few months from now, Well, what does that do to the employment trend in the economy? What's that gonna do to the unemployment rate? I wanted you to go off Phillips curve here and link it right, and what's it due to the unemployment? Right? Well, I think the umployment is really all about what's happening to demand.

And I think in the short term demands gonna be fine, because right now demand is above supplying a number of key areas like housing and autos. So I don't I think the economy is going to be fine in two thousand and twenty two. But of course that just makes the fence job more difficult. Bill Dudley, thank you so much an important essay. I'll get that out for you this morning as well on Bloomberg Opinion. He's a former president of the New York Fed. Michael Darda joins now

chief economist macro strategist mk M Partners. Michael, you and I had assimilating conversation five or six days ago about the nominal nature of the American economy, this kind of inflation, if we see it over one month, two months, three months, what does it say about the combination of real GDP and inflation by Tom, Yeah, I think you know, these numbers obviously are too hot. Um, so you know this

is a bit of a shot to the upside. But i'd actually go to the point that you know that Jonathan just made where the you know, the peak which looks like it it is in now on a year over year basis, is potentially a lot less important than where these numbers settle or where the plateau is. And if we have really rapid nominal GDP aggregate demand even if these year over year numbers were to come down by half, right, and we settle around four percent or just above that by the end of the year, and

it looks like that's the plateau. That's still a major problem for this bond market, a major problem for this federal reserve. And as we're seeing a major problem for the valuations that support b S and P five hundred. They are going down, and they are going down because long term interest rates have been going up. My does that landing strip for self landing just get that little bit narrower with this number? Yes, I I think it does. Um. You know, the Fed has its work cut out for it.

It does need to slow aggregate demand. Um. And typically, you know, starting from behind the curve, the success rate isn't very high. Uh So, Usually what happens is central banks start off too slow when they're behind the curve. That's the definition of being behind the curve. And then eventually they apply too much breaking force later on, and that's you know, typically when you're in a bust part

of the cycle. So I don't think that that part plays out this year, um, you know, but they've they've missed the boat a bit here. I think it's pretty obvious now they really should have gotten a tightening process going last year. And then even you know, with that that press conference last week, Powell seemingly you know, you know, explicitly ruling out greater than fifty basis points point moves.

You mean, why rule anything out in the early innings, Um, you know, step away from the forward guidance and you know, take it meeting by meeting. So I think the message was a bit bungled and confused as well, and that is not helpful in this environment. There's a big debate Mike about where the drivers of inflation are coming from and how much is really within the Fed's control, and that's perhaps underpinning some of the hesitants for a more

aggressive approach by FED Chair J. Powell. How much do you agree with that that the bulk of the inflationary pressures are coming from overseas, from supply chain disruptions, from geopolitical issues, and not from the dynamism in the labor market, from the willingness to spend from consumers that still have a lot of cash. Yeah, you know, it's confusing because we do have these supply side shocks playing out, and those shocks are raising inflation, and the FED cannot do

anything specifically about those shocks. But we've also had a super robust nominal GDP backdrop, and nominal GDP is robust to supply side shocks, meaning that a supply side shock will change the composition but not the level or growth rate of nominal GDP. So you know, we can actually get to a rough and ready answer to that question by looking at how much nominal GDP has overshot its previous trend and how much inflation has overshot the previous trend.

And if you do that, it looks like six of the inflation overshoot is actually demand side aggregate demand nominal GDP. If that's not the province of the FED, why don't why do we even have a FED? So that is the fed's responsibility, not the supply shocks. They are real, But this inflationary overshoot in large measures is due to aggregate demand. Michael, if they politically embed fifty basis point rate hikes, and they sort of say, I'm being very

sufficsticated here, let's see what happens. How far out of trajectory do you see there if they go fifty fifty, etcetera. Do they really analyze two meetings out in July or do they go out further before. There's a lot of naval gazing over what to do next. Yeah, I think they just need to try to extricate themselves from the last business cycle. You know, we still have Fed officials out there saying, well, we want to get to neutral,

and neutral is you know, around two and a half. Well, you know that might have applied to the last business cycle, but this cycle looks quite different, whether it's nominal GDP inflation, the rapidity of the fall, and the unemployment rate. And so the Fed's basically made two mistakes here. One isn't is assuming a flat Phillips curve up until you know, three and a half percent unemployment, because that's where we're

at the end of the last cycle. And then assuming that the neutral interest rate is right around the same position that it was in the last cycle. So you know, that's a that's a problem. You know, really what they should be doing is saying, look, we are explicitly aiming to blow nominal GDP to a more sustainable growth rate consistent with two percent average inflation over time that would

probably be around four percent per annum growth. It looks as of April the proxies for money in common nominal GDP we're closer to nine percent, so still way too fast. I think that's the best shot. The FED has engineering a soft landing. It's going to be difficult, um, but you know, embracing the Phillips curve in the neutral interest rate of the last cycle is just simply not going

to cut it. That will lead to a policy mistake in a severe face plant for the US ecompany a line Michael Bolson as alwise Michael Dowd that thank you, sir of m Camponts. Karl Weinberg has been doing this for more than ten years, and within that is a story career, including the workout of distress. He's someone that's actually addressed distress. See how you see how I did that? That's good. Thank you. Dr Weinberg joins us this morning

with high frequency economics. Carl, the zeitgeist is you have to manufacture some form of economic slowdown, contraction or n the art recession to extricate ourselves from eight percent inflation. Do you buy it? Absolutely? Tom, Good morning, and thank you for all of those words that rhyme, stress, distressed, and grizzled. Very kind. Um, Yes, we have the the only tool that that that that monetary policy has to bring price increases down, or the rate of price increases down.

It's the cause of recession. It's just as simple as that. The instrument is interest rates. That's a blunt edge sword and that swings against all sectors of the economy and it basically hammers demand down to meet supply in times when there are excess demand. My question is is the problem that there's too much demand right now or is the problem that there's too little supply? Because if there's too little supply, then a different policy mix should be implemented.

This goes back to Irving Fisher one, oh fund one. Not Stanley Fisher, folks, but Irving Fisher, one of the giants in the history of economics. He doesn't get nearly the play he should. And Carl, does Irving Fisher dynamics work now in a modern, open global economy or are the rules different this time? All the rules certainly are different this time compared to say seventy three, which was the last time when we saw significant supply constraints, and

back then economies were more closed. Today economies are more open. So when you have more demanded than supply, you don't necessarily have to get inflation as prices are bid up to ration out that demand, but instead you can get more imports. And that's what we're seeing when we look at the data for every major oil important country, We're

seeing the balance of payments blowout. We're seeing trade deficits widen, We're seeing trade surpluses, even the mighty German and Japanese surpluses are dwindling down or turning into deficits in the case of Japan. Because when you have too much money, Jason, too few goods, the resolution of it need not be inflation. Carl. It just feels like, as I think back over the last you know, several months, that the inflation that we're dealing with today is not necessarily wasn't caused by the

Federal Reserve. I'm not sure the Federal Reserve can get get us out of this. It feels like it's more of a supply side issue that has impacted a lot of the prices that were paying, whether it's at the pomper or in the supermarket. What can the FED really do and should we depend upon the Fed to get

us out of this inflationary environment? Well, you know, I agree with all of that, and we've been telling our clients at High Frequency Economics that on top of the inflation story, there's an even more important story, which is that within the inflation that we're experiences we're experiencing right now, that's the rise of all prices in all wages, we also have at the same time a change in the

relative prices energy compared to all other goods. And that's a different, separate problem, and it's a much more difficult kettle of fish to digest when energy prices go up relative to all other prices. Even in an inflationary environment, that is deflationary because even when people have to pay to fuel their cars and to heat their houses and to light their homes, right when they're done paying for all that energy, they then have less money left over

to spend on other stuff. And that's a separate problem, and in my view, that's a growth problem that's much more important than the little bit of inflation that we're seeing right now. Kurl Weinberg, with this High Frequency Economics, this day of elevated inflation in negative wage growth down negative one oh three. The vix thirty three point four or five NASK went under down one percent. These statistics are better than what we saw before the market open.

But now with the market open we get a reading. I should mention Bitcoin down dollars it is under thirty. So Carl, you know again, I guess one of the questions is is as this feder reserve you know, moves higher, moves more aggressively on the interest right front, the risk of a recession is that much more prominent? Is that in your model either twenty two or twenty three, it

certainly is. I mean, our job at high frequency economics is not to tell but fed what to do, but to tell the markets about the consequences of what the set is doing. And our view the rise and energy prices is causing at least a growth pause or possibly of session on its own and hammering demand down to meet a shortage of supply, my view, is not the right policy recommendation. It will make the be session the downturn more severe than it otherwise would be, or than

it has to be. What you want to have right now are zero or negative interest rates to encourage investment, to get people to substitute different sources of energy for petro energy, to get people to invest in being more efficient. That's what you need. You need low interest rates for that, not higher interest rates. Carl, I want to go back to your you. This is folks back when the ice

say you're just pulling back up the Taconic Parkway. Carl, I want to go back to what all this means for e M. I mentioned Irving Fisher Well, the red monograph that Stanley Fisher Road in two thousand is incredibly important. What does e M do in this mass? And I don't mean the idiosyncrasies of Turkish lira on winding over five team lyra por dollar, but as a general statement, what does Singapore do? What does giant India do? Indonesia? What does the Czech Republic do? Well, Tom, you just

spend a whole range of different circumstances. I think you can Grossomoto divide emerging market economies into two kinds. There are those that import commodities that are getting a windfall, and there are those that export commodities that are hurting. And for the economies that import commodities that are hurting.

They are going to face both lower revenue up their higher import bills because of the higher prices of commodities that they have to buy, and at the same time interest rates are going to go up on the debt that they have. So I think there's a subclass of highly indebted commodity importing economies that have to be watched carefully. I know that the I m F is already on this story. Investors also have to pay attention to the balance of payments challenges that many emerging the market economies

are going to face. Carl, thank you so much. It's been too long, Carl Weinberger with this with high frequency economics. Now for a different conversation on Disney, on entertainment and on the Bob's Burgers movie, which is the next big thing to be launched by Disney. Michael Nathanson joins us, of course, with Moffatt Nathanson and Michael will be blunt. Nobody's talking about the Bob's Burgers movie launched by twentieth Century.

Here they're talking about the fractured management of Disney. What happens here? What is Susan Arnold x Carlyle, What does she do? In the board do with the management of Disney looking more and Tom, that's a great question. I think they give a little more time. Um. Bob Jakick's contract has another ten months on it hit a three year do um, and I think they said observe he's done a great job on the parks. He's an ex

part chief getting through that. But the streets really wondering about their streaming strategy, and I think they give it a little more time to see if if they're executing against that strategy. Right. So, UM, get the tb D at this point, it really is And Michael, what questions do you have about the streaming strategy at the moment? Okay, Johnson,

So here's here's the big question. They had an investor day back in the original Investerday where they rolled out of strategy really a super fan Disney plus service that was targeted to their key verticals, right, Pixar, Lucasfilm, Marvel. That was about Iger Yesterday. About eighteen months later, in the December part of the pandemic, they had a second Investerday. They raised their targets massively because they apple form those first targets, and then they also wanted to broad it

out Disney Plus. So it's a one way of saying, I really wonder if that broader strategy is the right strategy. Right, it was the idea to be a supertamp service. It will be a smaller adjustable marketing a gap of probably higher price price point. I just wonder if they have the right strategy and and and you know, were they misled by the pandemic and the strength of the first year.

I thought they had a bigger, bigger business here, right, So that's it's it's a big question, and I like to hear them, you know, answer the questions whether or not they have the right strategy. Have they gone too broad? And so they kind of rain in the horns and become a more midge product, which is still a big business, but not the super business that maybe they wanted to be, like Netflix. How low is the bar right now, Michael, considering that the shares are poised for their biggest decline

since the bar is low? But at least, you know, the issue is obviously it's the concern on the macro, right, So the parks of Stage and will Stage and Massive comeback better than I ever thought? If you ask me two years ago to the stay, I would say it's going to take years for the parks to recover. Well, they've recovered, So I think what people concern about is, you know, are we at a point of the parks,

you know, six months from now rolling over again. You know, the linear networks we talked about all these years are not in great shape because of court cutting. Streaming is a capital intensive business, right, so there's you know, to me, the Macro and the Netflix sell officer has really hit this. But you know, I understand that nothing sell off the Macro. Of course, care really wound Disney here, Michael, I just

want to finish on the social issues. You'll view on how the navigating them at the moment and whether it's crucial at any point to the bottom line. They've got them sounds in this mess down in Florida. They're also very cozy with China, with the Chinese Communist partsy. You'll view them when this stuff really starts to match up. Yeah. Um,

it's interesting. Um on the China, the China front, there's been you know, the park in China Shanghai and the Hangheim Park which be there for longer, have not to big tributors in fact, the Chinese promise that China would open up its arms to let Disney in and have run the box with Puss and TV. So thoughts that's not happened. The question of Florida's one that is more in our view. Um, they haven't really addressed it. You know, what's the impact of losing their special protection as as

illegal entity. I suspect it actually is worse for the state of Florida than for the Disney because I think that the state would have to pick up where the counties have to pick up all their protection. But then jovin where we don't know, we've never seen before, is you know, will will it be a cohort of visitors at the parks who will be offended by disney stance

or decide not to go. Historically that's not been the case. Um. So you know, I tend to discount, you know, all the political news, but I do think it damages the terms in the past kind of the you know, the brand image of Disney and investing public eyes. They've made a number of missteps that were self self inflicted. I just bring the guide about you know, how good is is you know the directions company and how good is the leadership to which takes us back to the very beginning. Michael,

thank you. We've got to leave it at this conversation on going, Tom, the drama continues Michael Nathans and mfint Nathans and almost tried to catch up the good friend of this program. 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 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