Surveillance: Inflation with Rouse (Podcast)

and of course on the Bloomberg terminal. It's a tumultuous time to say to Lisa, and what we're gonna do, folks, is bring you the best minds we can on Global Wall Street and of course also in the nation's capitol right now. One of those minds is Cecilia Rouse. She is chair of the White House Council of Economic Advisors and survived at ten at Harvard University. A few years ago. Did you have the Feldstein version of the Manque version? I actually had a Cay I'm dating myself auto X sign. Oh,

there you go. She's dating yourself and she is well preserved because she's on her pellet. And that's a side story. Dr Rouse. Otto Eckstein would say, don't look at the headline. Data. Parse the data. You and the president have to parse the character of the nation's inflation. What part of it

is the focus of the President this morning. Well, look, the President is focused on the whole of it because he understands that the cost of food and gas and the price of everyday items for the American family, and so he comes from a family where that would be meaningful if you had to pay more for a tank of gas. Uh, And so he's focused on the all of it. He's today he's going to lay out his

plan for addressing priding price increases. Of course, as his economic advisor, I am focused on the part that is about core inflation, which is not focused on gas and food, and that tells us more about what the Federal Reserve can control as it it tries to address inflation, and also the parts that more enduring and that by be more challenging to address. So you know, the President is focused on the whole of it because that is the

reality for American families. The whole of it is. Politicians, away from your remit have to come up with a plan. We prove that whip inflation now, buttons don't work. What's the plan? So from day one, this president has been focused on generating and economy where there is sustainable growth that works for all Americans. So he's as he likes to say, he wants to build it from the bottom up, in the middle out. So that was what underlied the

American Rescue Plan. It was important to get shots into arms and for households and businesses to have the resources to get through the pandemic. So now he's focused on inflation, so he understands that he needs that we need to address gas prices. Much of the gas price increases of late have become because of the war of Russia's war

against Ukraine. The President, in trying to ease those prices, has released historic levels from our strategic petroleum reserve in concert without our countries, so that on net to date there have been about four hundred two hundred forty million barrels released worldwide. In addition, he's urging gas and oil companies to increase their production domestically by using existing leases and increase their drillings so that we can get more oil on the market. But he also was focused on

reducing long term costs for families. That is through for example, reducing prescription costs by getting allowing Medicare to negotiate prices, by addressing childcare costs, by addressing the cost of housing. These are policies that we know will help increase our economic growth, ensure that it's more broadly shared, and in the process reduced the cost for families. But he wants to do so in a deficit reducing way his budget.

You know, last year he reduced the deficit by three hundred billion dollars, on track to do reduce it by one point five trillion this year um and he does so by increasing taxes on our very wealthiest corporation cecilia. With retrospect, with hindsight being our guide, was it a mistake in March to issue four checks to every American who qualified? It is so hard to go back and do retrospective because it's hard to imagine the counter factual.

Mark Xandy, who has tried to do so and looking at all of the pandemic policies, has has estimated that had we not acted, this goes back to cares as well, because that was important as well, But including the American Rescue Plan, we may well have faced a double depercession. We would be facing elevated unemployment today and we would not have had the economic growth that we had last year, which is going to put us on a path for more sustainable growth going forward. So the American Rescue Plan

was an insurance policy. We did not know how long this pandemic was going to remain a challenge. We needed to get shots into arms so we could regain our lives. So worldwide, advanced economies are dealing with inflation because that is the consequence of helping families and businesses get through the pandemic when we were facing supply chains which couldn't

quite handle that sustained demand. So, Cecilia, how much does inflation have to come down before the end of the year for this growth that we're seeing to be sustained for that not to really curtail some of the momentum that we're seeing in households. So what's important is that we maintain our economic activity UH, and we don't want the inflation to become spiraling out of control and for individuals, households have become underwater. So what we need the Federal

Reserve mandate is price stability and full employment. You gave it your header. J Powell, the chair Powell UH emphasizing how the Federal Reserve is on it, and that is what they are focused on as well. The President would urge Congress to confirm his his nominees so that the Federal Reserve Board has all hands on deck to fulfill their dual mandate. So that is what's going to be most important to date. We see that inflation expectations are anchored,

so we're optimistic that the Federal Reserve can do what job. Meanwhile, the President is also focused on doing what he can to ease the pain at the pump and to ensure that families that can pay a reasonable price for gas. He's focused on food prices, UH, and he's focused on addressing those costs that we know that families face every day and that are so important for them. It's the City Arrest. Thank you the champ of the White House

Council of Economic Advices. Right now we do go global and it's wonderful to have with us again from City Group, Nathan Sheets. He's global chief Economist at City and former Undersecretary of the Treasury for International Affairs with public service at the Federal Reserve System as well. Nathan Sheets, wonderful to have you with us. I want to go to Stanley Fisher, who you are a nodding acquaintance with m I t a few years ago, which is suddenly the

US central bankhead is central banker to the world. How close is Jerome po Well to being central banker to the world. You know, that's certainly true during times of stress, where when global markets are under duress and under pressure, they need dollars, and on several occasions over the last fifteen years, the FAT has stepped up and provided that liquidity.

But similarly, I would say it in episode like the one we're in now, where central banks are struggling with this truly extraordinary set of shocks and an inflation environment unlike anything that we've seen in decades, that the FED is very much setting the tone. And as the FED shifted more hawkish, that opened the way for a lot of other central banks to be more hawkish as well.

What are the stresses? For example, I take sing dollar back to two thousand six, and the answer is we have a week Singapore dollar, which is usually a crown jewel of tiger economies. Tell us what those those those economies do after the easy decision to defend by raising rates, the the FEDS moving, and as the FED moves and the US economy is under pressure but still looks better than a lot of h the rest of the world.

You're seeing the dollar strengthening, and there's been a debate about how much traction the FEDS getting in financial conditions, but make no mistake, it's getting traction on the dollar, and Tom, as you suggest, that has echoes throughout the rest of the world, and uh the US stronger currency, it's helpful frosting fighting inflation, but the weaker currencies that are on the other side of that are inflationary in those countries and making the challenges for those central banks

even more acute and in adgestion for many emerging market economies, it creates tensions in their national balance sheets giving their exposures to dollars. So it does create, as you suggest, some exquisite dilemmas for these central banks and may force them into further rate hikes at times when they don't

want to hike rates. Here in the United States, in about twenty four hours, as John was mentioning, we are going to get that CPI print expected to come in at eight point one percent by economist surveyed by Bloomberg, down from eight point five percent in the prior read. How important is it to look at the components of what's driving this inflation. What's your projection for how we can understand the granularity of this report. I think that

looking under the hood is going to be critical. We're expecting a zero point four percent month to month read for core, somewhat lower for headline, but when I look at underlying components, I just have a hard time being

too optimistic about the inflation outlook. I think in this environ with high commodity prices, supply chaining pressures, potential further disruptions as a result of what's happened in China to supply chains, that it's not a positive environment for for goods prices, there's a lot of inertia in shelter and ownery equivalent rents. That's not looking like a very positive picture.

And then finally, for services, we've got a red hot labor market and wages may not have risen quite as much as headline CPI, but it looks to me like pressures on services prices will likely be pretty durable as well. So I think those components right now are just not very encouraging and tell a tale of longer lived inflation. So do you think, Nathan, that we've seen the peak. You know, maybe in some arithmetic sense, yes, uh, you know, is this the peak for twelvemonth headline inflation or even

twelvemonth core inflation? Possibly? Is it? Is? It likely to be on a bit of a downward trajectory, but a very gradual downward trajectory, and one that even at the end of this year, our expectation is the measures of core prices, be they PC or cp I, are still likely to have four handles well above federal reserve targets. So maybe it is peak, but it's really more, as my colleagues have said, really more of a plateau. Nathan, how much control does the FED really have over this

inflationary impulse? If so much of it is coming in addition to the housing in addition to the labor market, to what we're seeing in China, to what we're seeing with the oil markets, how much control can the federally have? This is this is the critical question now, Paul Paul Volker that taught us in the nineteen eighties that if the BED is aggressive enough, it can move that demand

curve sufficiently to UH to tame inflation. But that is a very painful process, and I think Ultimately to get out of this without a recession, the fat is going to need some help from the outside world. We're gonna need to see these supply chains improving, commodity prices come down, and they's in the common feature of city group economics, from Villin Powders through Catherine Van to you is respect for the data. Do you take comfort in I m F or w t O global g d P guesses

now or is it an impossible task? The reality here is that we as economists have this uh tendency to UH to forecast immaculate landings. But why do we do this? Why do we forecast the soft landing where inflation kind of eases down, grows slow some, and we avoid recession. The reality is that the other outcome are just so messy it's hard to figure out what they look like on paper. So we write down these these these soft landing scenarios, and there is a plausible path to a

soft landing with some lock. But they're right now. The inflation risk, section risk, even the stagflation risk, is quite appreciable. And and those kinds of forecasts don't don't help me sleep a whole lot better at Nathan are we at any point where we turn to a nominal analysis from a real analysis, are things so out of whack we'd literally go back pre Arthur Burns As as inflation surges, you have to start thinking about the nominals as well

as the reels. Now, to be clear, I think at the end of the day, how does the FED attraction? And the FED has to get traction ironically by thinking about the reels. And I think ultimately the question that the FED it's got a struggle with is how much are they gonna have to push interest rates positive in real terms to get traction on this thing? And in their SCP from a couple of months ago, they said, well just a little bit positive. That's not clear to me.

That's not clear to me at all that we may need a substantially positive real rate. So it's the world's thinking more nominal. It's gonna be critical for the FED to think more real. Nan also gonna get you hope for you a Boddy as other wise Nathan shakes. That sits eight. Lisa shllet is with Morgan Stanley Wealth Management. She hinges everything and having a plan and then heaven forbid staying with the plan in times of stress? What's the plan, Lisa? And how do you have the courage

to stay with it? Right now? So? Look, I actually think as radical as the last you know, week has been in volatile as the last week has been, there is an element of it that is somewhat predictable. And what I mean by that is that the market has finally gotten to the point where it's digested, Uh, the level and degree to which the FED is going to be hawkish, But they didn't hadn't yet really really, um, you know, fast forwarded that to what are the probabilities

that the FED can really execute a soft landing? And so we know from history. You know that in the post World War two period, the FED has tightened roughly fourteen times. Eleven of those episodes have resulted in a recession, and only three times have we pulled off a soft landing. Uh. And we are operating this is a FED at JEROMEE. Powell admitted this that is operating with an against a

backdrop where there's an extraordinary degree of difficulty. Not only is the macro environment complex, but the geopolitical environment is complex. And look, the FED itself is trying to do something that they've never done before, which is simultaneously raised rates and reduce the size of the balance sheet. So to me, yesterday was very much something to be expected that eventually we were going to get a growth scare where everyone starts worrying about the fact that we might in fact

have a hard landing. And while we continue to be in the camp that says we don't see an imminent recession, the reality is is that growth may slow much faster,

uh than than folks believe. And so it's notable to to your and Jonathan's point that finally the bond market is getting on the bandwagon, meaning starting to to worry less about upward moves and inflation and potentially beginning to think about downward moves and inflation, which are you know, a reflection of weaker growth, So at least a two pound question, just to be clear, it sounds like you

expect one more down side and equity prices. But to the second part, if we have that dance side, that set off just the character the nature of the sound of change, Uh yeah, I do. I do think that it does because I think, um, you know, we start to get a lot more defensive. It's why why bonds

are finally getting a bid here UH. And so I think that that defensive trade that unwound, the long duration, stable growth stock trade that was really unwinding fiercely last week UM starts to get a bid uh And And again it's what do I want to own if the economy is really genuinely slowing. So you're basically basically saying, Lisa, big tech is a bright spot for the next couple

of months. So I want to be really careful because I don't know that I think big tech in in all caps is but I think long duration assets actively selected are the place to be. So we have begun to add duration. We started that about three or four weeks ago, albeit it was early and and you know, many of our clients who began to add back UH into bonds have not had a great three or four weeks.

But but we do think that that that trade may begin to work, and some of the higher quality UH growth oriented names are certainly worth looking at today and and buying, And that's what we're advising our clients to do, Lisa. There have been some people who have talked about the unwind of certain nonprofitable tech companies and others as the

bursting of a bubble. And I take a look at Peloton this morning, the shares were down from the peak even before going into today the shares getting massacred right now in pre market trading after they reported their earnings. Is Peloton a one off? Or is this uh something that is endemic that has not fully been beaten out of the system. Uh? And oh, I think we're starting to get there. Uh. And and on the stock side

of things, I think we we certainly have. What's interesting is among the unprofitable tech companies, uh, the stocks may actually have led uh. And the credit market probably needs to catch up and and really blow some of these um you know triples see and junk spreads out even further. Um. But but from a stock perspective, you probably are starting to get to the point where there's enough blood and enough pain in the streets uh that these valuations start

to look a little bit better. The key issue, however, is to recognize that companies are now and investors are now looking at you know, cost of capital, and that means, you know, to what extent has cost of debt gone up and to what extent has cost of equity gone up? And both have gone up. Uh in this rising uh you know rate environment and the policy pivot. Lisa Shanna awesome as a wife from Morgan Stanley Wealth Management. Lisa, thank you right now. Cathy joins Jones, chief fixed Income

Strategists at the Schwab Center for Financial Research. Kathy, A given bondy TF is down in price nine annualized big loss. I would just the bond market handles price decline and a bond bear market differently than the equity market. What are you observing from SWAB clients? Is they enjoy price decline? Well, I'm not sure they're enjoying price decline and bond funds. But what we are saying is UM investors trying to take on a little more income by going into longer

duration bonds. And this has been our call recently to start gradually, not at once, but gradually adding some duration as as yields go up, because you know, you have the opportunity now to get some relatively attractive coupons at prices that are often below par. So that means not only the opportunity to earn more incommon a portfolio, but

also potential capital games. Where is the biggest opportunity right now, Kathy, when you talk about those coupons, is it in credit and the riskier the better, or is it in full faith and credit US treasuries. Well, I would cite it a little bit more carefully than that. There are two areas that we really like. One as municipal bonds. Um you can get on a tax equivalent basis for a very high income earner uh A north to five percent

in municipal bomb, high quality municipal bonds. We're okay with investment grade, but we want to stay a little more careful because we do think we're going into or we are in credits part of the credit cycle where we'll see some further spread. I think we're not crazy about the high yield simply because this is this is the part of the cycle where high yield usually does most poorly. People forget that it's not the beginning of the rate

hike cycle. It's usually the end of the rate high cycle, when the economy starting to weekend that you start to see those high yield spreads really move that, Kathy, I want to focus on that for a minute, because we saw a pretty pretty big move in spreads yesterday in the high yield sector, which is something new. We really hadn't been seeing credit respond in the same kind of way that stocks have been responding, and yet suddenly we

do see some sort of indication here. Is this just the beginning of a widening of a protracted selloff and credit or is this basically some sort of mini capitulation that will be viable for a lot of investors. I think it's the former and not the ladder. So I think that we have seen, say, triple C is really underperformed for quite some well quite a while relative to say, you know, the higher end of the high yield market.

But as we get into higher rates, you're starting to see the impact on cash flow for those weaker companies with weaker balance sheets, maybe not as great as a cash flow. It's one reason we don't like loans as well now, simply because we're starting to see the effect of the interest rate increases and that's probably going toor road the ability to to meet those obligations at the lower the weaker credits. So definitely would not be chasing

how yield at this stage of the game. Kathy, there's a religion in the equity market that if you go down, correction, bear market, or worse. At some point you grow your way back to where you were the market high, and there's long spans where this has been a challenge. How do you do that in the bond market? If I'm x percent down from the summer of two thousand twenty, how do I grow myself back with yield if I don't have attendant growth underneath it like I have in stocks. Well,

it depends. If you're holding individual bonds and you hold them to par, you're still gonna get. You're still going to get your principle and your interest payments barring a default all the way along. So you've earned whatever that current yield was when you bought the bond. If you're in a bond fund, it usually takes longer, but usually what will happen in a bond fund is the manager is reinvesting for higher income and on a total return basis over time, assuming that rates don't go sky high

from here, which we don't think is likely. Um, you know you you're earned your way back with the income component. Kathy, thank you for bemist this morning. Kathy Jones that of the swap Sense financial research, 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 in in national 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