This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woyd's along with Tom Keane and Jonathan Farrell, join us each day for insight from the best in economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. We get lucky. We get to catch up with Bob Michael twice in a week, once on a Sunday evening.
And this is more normal Bob, Good Morningtier from JP Morgan Asset Management. Bob Mike McKee messaged me earlier and he wanted to know one's Bob Michael on today? And two what does Bob want me to ask in a news conference? What is it today? Bob? Well, I think he's got to ask that the FED was set up the Federal Reserve Act of nineteen thirteen was designed to prevent a run on banks. So they must have seen this. They must have seen the deposit or outclothes. Are they
seeing anything else that wearies them? And what is that? And I think there are things in the commercial property market. There are things in the bank loan market where the resets have doubled and tripled what borrowers are paying, So there's still a lot out there. So, Bob, how did they parse a message that goes from we want credit conditions to tighten to oh, my goodness, it's not a
financial crisis, but things are tightening too quickly. How do they parse that line to a market that doesn't like nuance? They don't need to, Lisa, They've told us they're data dependent. Look at the data they've won. They don't need to pile on. Look at inflation. If you look at month to date ten year tips, they're down thirty basis points to two point one percent. Inflation expectations are coming down. Look at the University of Michigan consumer sentiment one year
inflation expectations, they're down the most in two years. That's pre when they started high grades. They're at three point eight percent. And then if you go back to the charter, they were set up to prevent a run on banks, Well, they pushed it to the point where they had to step in and stop a run on banks. So they've achieved the maximum pressure they needed to to bring inflation down. It's happening, it's in the data. You pause any weight,
then how do you make sense, Bob? If they probably saw the outflows from depositors from some of these banks before that speech, that testimony from j Power where he opened the door to a fifty basis point rate hike, how do they signal that the scenario has changed so dramatically in two weeks, given that a lot of what you're talking about, the winning of their war would have been won before what we saw with Silicon Valley Bank. Honestly,
it really doesn't matter. These are the long and variable impacts. They're already catching up to the economy. We're seeing it. They're starting to bite hard. What's going to happen over the next three to six months. Let's wait and see what happens. For sure, We've looked at every time the FED has piking rates. On average, it's been about thirteen months to recession. So they could stop here and then
let's see what happens over the next year. We think with quantitative tightening it actually pulls that forward into the end of this year. So, Bob, at the start of the year, when credit was ripping, high yield was doing really well. You resisted the urge to parliament as well, So I'd be interested to know what you've actually been doing over the last couple of weeks as things have started to go the other way and you weren't on the wrong side of the trade, so to speed. But
what did you do. I'm holding on to our conservative position where we've had hedges in the CDX market. You're going to have to pry them out of my dying hands. This is the start, this is not the end. So let's talk about spread levels. So spread right now is at four eighty was as tight as about three ninety a number of weeks ago. You just talked me through, Bob levels. You and I've talked about this before, but the basic argument goes something like this, it's a high
quality index. It won't get wider in the way it has done in recessions previously. Bob, you've pushed back against that notion. Why yes, because I've lived through every other cycle in the high yield market. People forget, this market isn't one hundred years old. It's just over thirty years old. And you hear that same story all the time. This time it's different. But the problem is that fear always replaces greed. People are scrambling for up in quality. We've
seen in the last week. You don't know where the problems are going to happen, so you just try to de risk every single time high Yield goes to a minimum credit spread of eight hundred basis points over. I think we're easily on track for that. I know last time on Sunday, I think it was the evening we talked a little bit about non bank lenders, which are us in the market. So we're already starting to hear from our clients that they want to know what we
hold in their portfolios. They're asking all their managers. So we're going to start tight credit conditions ourselves, just because our clients don't want us to take the kinds of risks that they were comfortable a year or so ago. That's not just us, it's every manager. It's in the public markets, and it's for sure in the private markets. So, Bob, how much has that accelerated over the past two weeks?
And John asked me earlier, even if this issue with some of the medium sized businesses, medium sized banks rather is resolved and we do get some sort of backstop that staves off some sort of contagion risk or any of these concerns. How much have credit conditions tightened over the past two weeks anyway that will be persistent. Well, they've tightened everywhere. We've talked about the central banks waiting for those cumulative long variable lags to catch up. So
they're going to catch up. So unless they start cutting rates or ending QT, that's going to be progressive. So central banks are still tightening credit conditions when you look at senior loan officers surveys, banks for sure have been tightening credit conditions, and I think with what's happened over the last couple of weeks, there's no going back on that. And then I talked about non bank lenders. We're all doing the work for the FED anyway they can hit
the pause button. The banks are still tightening credit conditions, and as I said, non bank lenders are as well. I hate these analogies, Bob, but you mentioned commercial real estate. A lot of people are pointing at it. And if you could say where we are in terms of the devaluation in commercial real estate, are we at the beginning, are we at the middle? How much further does it have to go. Well, it depends where you are in
the snake. I think for sure that property companies are already having problems with offices in central business districts, right, and you're just now starting to see that in some commercial mortgage backed securitizations. But there's the whole reap market, there's the CMBs market, there's the whole regional bank market where a lot of their loans are into the commercial property market. And then there's the g setbacks. So these things don't just tend to happen and go away. They
tend to build, and they're with us for a while. So, Bob, just a final question from me. Number of weeks ago, you said to me the whole curve three handle, two's out to thirties. We've seen that. Are you saying right the way down to three percent? Yes, I didn't say three handle, I've said three percent. There we go, there's the three point zo minimum. Wow. JP Morgan, the thirties asset management, the brilliant Alicia Levine is alongside us today here in New York. She's got a line poll has
no good choices today. There are no good choices today. I'm just going to wit through the price action, and then we'll get Alicia's thoughts on it. Equity futures right now unchanged on the SMP five hundred yields up by a single basis point on a ten year three sixty two. We've talked about the journey of the two year since the FED last met, from four point one sent all the way to four point two percent, with a lot of ziggin and zagging in between. Lisa, I feel bad
for the two years. It's gonna be tired. Its journey has been long, it's been tumultuous, and we've been all who slept either you feel bad for it for the front end of the yield curve. Look, you got to bear with us because we've all been up since for you know, the past week and examining all of this, well, it never ended, and we're dealing with head spinning realities right, all of the complications you're just talking about passing through.
Then try to give a market response to that, which always is wrong initially anyway, and it's always exactly what you don't think. So it's sort of you know, what's the point, Let's go back to bed. Alicia Evan joins us right now, the head of Equities and Capital Markets advisor at Bmy melon Mouth Management, Alicia, want to fool to catch out with you. Great to be here today. No good choices today, No good choices today. Twenty five.
We do twenty five because the market is giving the FED twenty five in the pricing and so in a sense it's the easier decision. I'm not sure they should do twenty five here because I think what happened in the last couple of weeks was possibly the beginning of a credit issue as smaller and medium banks start to withdraw on credit provision. But the FED will go twenty five. And as you said, it's all in the messaging, and as we've seen sometimes the messaging can be really complicated.
I would look to Christine Laguard, and I'd look to the inflation number in the UK this morning, as you were talking about earlier, as to signals of why we're going to do twenty five today, and as to the dat plots, I think the dat plots pretty much stay on track here for those reasons. If the Christine Laguard managed to message very well that they're keeping the two separate and can keep it separate, and I think that's what the FED ultimately is going to do today as well.
Let's take the headlines from the Guard earlier. There's no trade off between price and financial stability. We will not entertain trade offs from the primary objective. What does that look like If Chairman Pound repeats exactly those saying words later in the news conference, so I think you keep
ongoing increases in the statement. If he keeps to that kind of we're going to keep the two separate, and in your mind you need to keep this thing separate, then I think you keep the ongoing increases with the open endedness. I don't think the dots change, but you do keep the ongoing increases. But being open to that, the FED has the tools necessary to deal with the financial stability issue and those two things will be separate
in the end. As we've seen all over, inflation on the way down has not been linear, and I think opening up the devishness that the market may want to see risks that other piece of it. And it's I think Laguard really showed the way to how to capture this right here, So I would suspect that he's going to separate it as well. Now, did something actually happen in the real world two weeks ago with the banks, and I think the answer is yes, right in the
real world, credit contraction has likely accelerated. So let's take a step back and talk game theory, because that seems to be what we're all doing right now, to try to game out what they're signaling versus what they're going to do, versus what they know, versus what you believe. And I wonder if, as a market participant, you think that ja Pell has less credibility not only in having the authority on what they're going to do, but having any extra visibility into the path of a market that
has been highly, highly in determined. So I think Japell's credibility is intact here. He's been very single minded on the inflation issue. There was some talk earlier in the other press conferences and talking about this inflation eleven times, but I think ultimately that the pivot was real, and I think the pivot is still there. And I think the thought that the FED actually does have the tools to understand the financial stability issue and what's happening with
the banks is a very real and true thing. And if they hike today, it is a signal that they think they ring front fenced this and can prevent further deterioration. So if you say that there really has been something material that has happened in the economy, what's your investing change as a result? Right, So that's the big question. Right. We talk about the economy, but in the end, we
have to invest our clients money. So our thinking on this originally was that the recession seemed to be pushed out and maybe the end of twenty twenty three into twenty twenty four, two weeks ago, when that inflation, all those inflation reads came in really hot and the economy seemed to be on fire. What we've said today is that this event actually changes, that the recession comes back
into twenty twenty three, earnings likely go lower. We're pretty low, and earnings this year anyway, we're neutrally weighted on equities. We never really went for the full you know, disinflation is here, climb back in hand over fist, get greedy, because we simply didn't think that this was going to be so easy to get out of in the end. In the end, this is going to be a hike cycle. The fastest in forty years four hundred and fifty basis points today four hundred and seventy five basis points in
twelve months. How do you get out of this without a recession or without something cracking. Well, in fact, something did crack yep so, and that tends to be not just one thing. So when there's an issue in the regional banks, they pull back on lending, and that's what happens. And as you know, more than fifty percent of the lending to various sectors of the economy comes from these banks with two hundred and fifty billion or under in assets.
So let's work through the second sinc bank liquidity issues, credit issues because a tighter lending recession gets brought forward. We can agree on the date when they really kicked off February eighth, the Wednesday evening overnight into Thursday Wednesday, the eighth of March thirty nine, ninety two on the SMP.
We're above that now, right Why because the market is pricing in that the regulatory authorities have ring fenced this, that they've prevented further deterioration in the system, in the banking system. Had there been doubt, you would have seen
more of a deterioration, but it simply hasn't happened. So the equity market is saying, look, you know, the FED and the FDIC and the regulatory authorities have done the right thing, and they've done it well, and the stragglers left will be dealt with all things being equal, then is a slower pace of rate hikes and potentially fewer of them, which is what people have been expecting and pricing in stimulative for risk assets. It will be taken as such. It shouldn't be, but it will be taken
as such. The market is on a hair trigger waiting for the pivot, right, I mean, if you think about starting less July, it was the pivot, then we pivoted from the pivot, then we went back to the pivot, then we pivoted from the pivot. It's nuts, It's really nuts. I don't understand why that with the six percent inflation, the market is not understanding that, actually the FED is going to keep on hiking as long as they ring fence the stability issue and they it will keep on hiking.
We're missing a point, aren't We were just kind of not trade in the recession. We want to trade the recovery. To the recession we haven't had yet. We want the trade after the trade, totally right. There's been a different trade in the last couple of weeks, and the market wants the trade after the trade because it's all happened so fast. Think of how quickly those deposits left the bank, right, it was people on apps, So the systems moved quicker.
Trading has moved, quicker. Regimes seem to move quicker, and the market wants to price it in before we get through the recession. No joke. I think we've had three different regimes in the first quarter alone. Just take a look a bit two year yield. I mean, we came into this year and it was all right, cuts recession. Then it was boom, no landing, more hikes maybe six and now it's financial instability pause. The hiking cycle is
over and it's March twenty second. We haven't finished key one, right, So the market keeps on pricing in the pivot. That's the key thing. We keep on coming back to it. We hold thirty eight hundred, we call that level. I suspect we keep on bouncing around in this range between thirty eight yo hundred. It's going to be a very unsatisfying year, because they will be signs that there's some credit content contraction along the way. Earns will come down.
Our portfolios are prepared for that. We thought this six months ago. We never believe that there was no landing. How do you have no landing when you're hiking like this and you start from a nine percent inflation rate? Just real quick here, Then what do you tell clients? Look, we went we went. We were underweight bonds last year, as we should have been. We went neutral umbonds. So we increase our waiting to bonds. We are conservative. We
are telling clients it's going to be very volatile. We do think you actually end the year higher than you ended twenty twenty two. It's just not going to feel very good. So with our higher rating on bonds and our neutral unequities, we can pivot around there. But in the end, we don't hold cash in our portfolios and so we do relative relative trades and we think we're well positioned for this. In the end, the call and
the real economy has been fairly fairly accurate. I'll say that it's what the market does with that, which is which is always the hot bit, which is always the hard bit. But I think that the table pounding on bonds is the right call. I'd always prefer to be wrong about the economy and just right accidentally about the market, that's correct, you know, Yeah, better to be lucky than right, right, Alicia, this was great as always, Alicia fbny manon he yields
climbing just to touch higher. But the round trips that we have seen again and again really a head spinning for people trying to get their head around where we are in terms of a disinflationary course or not. Jonathan Pingle among them. He is chief US economist at UBS. Joins us. Now, Jonathan, can you give us a sense of how much has changed for you over the past two weeks? Well, I mean getting the magnitude exactly right
right now is going to be just about impossible. And I know I was listening to some of your earlier conversation with Jonathan. I mean, this is one of those things where we can definitely sort of sign the effect. I mean, if you thought about the First National Bank of Pharaoh, maybe they're double checking their liquidity capital levels. You know they're gonna you know, they're they're gonna be
wondering what the bank examiners are looking for next. You know, on the margin, this does go This is pretty likely to imply tighter credit going forward, when credit was already tightening in the US. So you know, we'll be watching the same things you all are watching with the H eight data, lending data for the provision of credit. But certainly it's a net negative in our expectation for the
US economy. I've heard that the Bank of Faro has an unlimited credit line out to ac Milan, but I'm not going to confirm that, and that is just according
to sources. I'm curious though, from your vantage point. We heard from a former FED governor this morning that all things being equal, this is not a credit problem, that there's not necessarily the same degree of credit tightening that people are ascribing the recent turmoil to the market, that in fact, there still is a very big inflation problem
on the ground. What data are you looking at for your compass amid the noise, Well, you know, we are still getting you know, real time weekly data on everything from lending, mortgage applications, initial claims. We are getting regular you know, price signals from you know, big data sources, whether it's air fares used cars, right, So there's still a lot of data that's coming in every day that's going to allow us to assess, you know, what's unfolding
and pretty close to real times these days. I mean, that was one of the things we really learned during the pandemic was you know, the availability of a lot of these new data sources. So you know, we are watching all of that, um you know, in particular the price data. But I think on net you know, we were already starting to get bearish or were bearish about the US economic outlook considering you know, there were some tentative signs that the rebound and data we saw in
January really wasn't much of a re bound. And I think if you really put yourself in the position of a bank officer these days, you know, the guests are right. I mean, we don't look at this as a giant
capital hole. It doesn't look like a sudden stop. But on the margin, this does seem more likely to imply less provision of credit than more, and less credit impulse for the economy usually isn't very good for growth, which raises also the issue of whether the VENT chair J. Powell recognizes us today in the press conference we heard from Betsy duca Is referencing her earlier and she said this, Chairman Powell was clear he expected the projections to come
out in the SEP, the Summary of Economic Projections to be higher, and I don't see any way that doesn't happen. And she thinks that's going to be the big surprise of today's press conference. Can you give us a sense of how much you agree with that and what that would mean for your estimates of how quickly recession would
take hold. Well, we do think that a they're going to raise raise twenty five basis points at today's meeting, and we do think that, you know, the median the median DOT is going to revise up for twenty twenty three by twenty five basis points compared to the December SEP. So that might sound hawkish and it might be a surprise, but we also think this comes with very data dependent language.
I mean, we think they are going to put right in the statement something along the lines of at any additional or any further increases in the target range will be dependent upon economic data and implications for the outlook. So I think when cher Powell frames the sep he is going to frame it as and he's done this in the past. He doesn't you know, it's not a commitment device in his view, and he's been quite frank about that. So we are expecting him to acknowledge that
base case for the committee. You know, they do need to fight inflation, but we do expect him to admit that this does depend upon, you know, how events on fold going forward. Now going to the credit impulse, though, we also do think he is going to make a strong has that the banking system is resilient, safe, sound,
and well capitalized. So while he is going to deliver this message of monitoring considering credit conditions, he is going to I think, you know, on equivocally sound a confident tone about the banks, which comes in tandem his conversation, in tandem with what we're going to be hearing from Treasury Secretary Jennet Yellen, and she testifies in front of its Senate panel, so they have to be on the same page as we were talking about earlier, and they're
probably going to speak to that same issue. Though we are looking right now at a market that has repriced in rate hikes and then repriced in rate cuts. And it's been this sort of ping pong match, as we've been talking about for a while between that right now still pricing in cuts before the end of this year. Do you think that that's premature based on the rhetoric and based on the economic data that you're seeing come out, Well, the economic data would not on its surface imply the
Fed should be cutting later this year. I mean, you know, our forecast for corep see inflation for you know, a week from now, is that it's still going to be hung up at about four point seven percent. But you know, we are forecasting that the FED is going to be cutting rates later this year because you know, we do expect a certain amount of disinflation to be setting in as we roll through the middle of the year, and we expect to see a much weaker economy in the
second half than the first half. So you know, so, I mean, if you're looking at you know, you know we have low claims, yes, we have you know, elevated inflation right now, but our expectation is, you know, what's been put in train with the rate hikes already, what we're seeing in credit conditions is going to lead to a meaningful slowdown later this year, Jonathan, how many times this year have you changed your forecasts? Now? We haven't
changed it a whole lot since last November. Um. I mean the main thing we've changed in our forecast was taking on board the upside surprise in the January employment report, and we did have to nudge up our inflation projections in a report this week as the incoming January February data.
But you know, the broad contour of GDP and the slowdown expect in the second half of the years really been pretty much the same since we've made a pretty big overhaul in the projections back in November where we switched from expecting a soft landing to expecting a hard landing. So how many times have you thrown up your hands in frustration at the narrative changes that you've heard on Wall Street that have really informed what you're seeing in
market pricing? Well, I mean throwing up my hands as opposed to you know, you go from times where you look like you're doing well to you know, the heaps of criticism being layered upon you. But you know, but the data is not going to go in a linear direction. I mean, I think for me, the big surprise was forecasting a two hundred and ninety thousand gain in the January employment report and then seeing five seventeen and falling out of my chair. But you know, you know, we've
been doing this a long time. You know, high frequency forecasting is difficult. There are surprises along the way. But I do think if we think now the starting point of the US economy, where the level of activity has been pushed up very high by the fiscal stimulus, that's faded. We have undergone a very rapid monetary policy tightening cycle, and you know, we're getting to a point now in the labor market where there's sort of more and more signs that hiring is kind of caught up with activity.
You know, I think you're at a point now where, you know, further fiscal drag and some head wins for households this year, the ongoing impact of the monetary policy tightening, I think all points to a week or second half. Jonathan Pingle, thank you so much for being with us. Jonathan Pingle of UBS. Imagine turning up to the Federal Reserve in August two thousand, A night that was Betsy Joe, the former Fed governor, Betsy Joints, right, now, Betsy, can
we start there? Can you describe what that was like starting on the Federal Reserve in August two thousand a night, So it was August two thousand and eight. I was sworn in about thirty minutes before my first FOMC meeting, which was the last normal FOMC meeting there ever was. And after my second f OMC meeting, we went into the Chairman's office and voted to lend eighty five billion
dollars to AIG. So that's how I started my FED career. Well, Bessie, can you tell me how different this moment is relative to what you went through or those years ago? You know, it's different, but it's it's the same. You know, the Fed's job stays the Fed's job, regardless of what the current events are, whatever the crisis of the day, the FED has to keep its eye on what its job actually is. Well, let's talk about what its job actually is.
There are dual mandates. One of them is inflation. That is the first and foremost one, but it's also oversight. How much has a lack of supervision over certain banks complicated their role right now? I think supervision has been a complicated factor and I think it's supervision, not regulation.
Those terms are off and used interchangeably, but regulation applies to the rules of the road, if you were Supervision is being in the banks, paying attention to what's happening at each individual banks, not to banks as a whole. And that's where it seems to me that the problem lies. And this raises a question about how much signal there is from a federal Reserve where the chair went before Congress and really opened the door to a fifty basis point rate hike just days before collapse of one of
the biggest banks, going back to the financial crisis. I'm curious what you make of that and how much signal there will be in terms of their visibility and other problems in the banking sector today. So the role of monetary policy is not to protect the balance sheet of the banks, and the tools that the FED has to deal with the financial system are very different than the tools that the FED uses in monetary policy. So the primary tool in the financial system is the fedsibility to lend.
That's why the FED was established to lend in liquidity crises, which which at its core is so the facility that they established the weekend after SVB failed is right in their wheelhouse. That is their primary tool for dealing with financial stability. A lot of people I think they'll separate it from from the monetary policy decision. A lot of people argue that it's not quantitative easing, that this is
not a reversal of quantitative tightening. That yes, the balance sheet rowse by three hundred billion dollars, but it's a different mechanism. It's not buying, it's lending. It's a different type of stimulative effect. Do you draw the same distinction or do you think that this is basically the end
of quantitative tightening. Actually, they would have to offset the increase coming from the loans with a further sale of the securities on the balance sheet to offset the quantitative easing if you will, that's going to result from the balance sheet growing because of of the loans that they're making. If you go back to again two thousand and eight, the whole quwe one was not actually did not change
the size of the FATS balance sheet at all. It simply replaced the lending that the bank had done during the crisis with security, so it kept the FATS balance sheet from contracting but it didn't expand the FATS balance sheet. It wasn't until QUE two and three that the FATZ balance sheets started to expand, Betsie. A lot of the post crisis apparatus that the Federal Reserve came up with was designed to communicate low for longer. The dot plot
was an effective tool to do that. You could just show going out years that we weren't looking to raise hikes hike rates for a long long time. Betsy, how do you think that dots will be used today for signaling? So at his last press conference, Chairman Powell was very very clear that he expected the projections to come out in the SEP, the Summary of Economic Projections. He expected those dots to be higher with the new projections. And
I don't see any way that that doesn't happen. So the decision in the room needs to for FED credibility, I think needs to match what its projections are. So I would focus not just on what the decision is today, but what are those projections say about what the terminal rate is? And I think that's going to be the big surprise, Betsy. You think that they're going to increase those dots, They're going to increase the projection of where Fed funds rates will ultimately end up despite some of
the turmoil recently. What's going to be the justification for that? Are they going to double down on this idea of inflation and that where we still haven't gotten restrictive enough despite signs of credit tightening that has been accelerated over the past few weeks. Well, the way I interpreted the comments was that the expectation was that that inflation would come down more slowly than they had expected, and the
dots come from expectations of inflation. If you remember, there was a lot of discussion in that press conference, and at one point Chairman Pals said, you know, my forecast is different than yours. If your forecast is right, your rate projection will be right. But if my forecast is right, then your rate forecast is going to be wrong. And I think it would be a mistake to not remember that and not pay attention to it. But see, just
one final thing. One thing we've talked about over the last couple of weeks is whether the FED knows things that we don't know when it comes to financial stability. When you watch the news conference later, are we watching a chairman that knows things that we don't know about a financial system. I think you will find that he probably he certainly knows things that we don't know. But whether they are things he's trying to hide, I don't
think that's necessarily true. Again, his credibility is his most important asset, and so he's not going to be trying to hide anything. But when they talk about the strength of the banking industry right now, the banks are strong, capital strong, asset quality is extremely good. This is this is an interest rate risk issue, a liquidity issue, and you know it goes back to the basics of banking. This is more like the S and L crisis than
it is like two thousand and eight. What are the flows of information that the FED has access to in real time that we don't see bet Sea, I don't know how much it's really that different. I mean, they get a lot of information, and you have a staff that compiles that information and reports it out on a
regular basis. The banking information is going to be coming through the supervisory activities in the reserve banks, and my guess is right now that the supervisors are in every bank looking to see what the liquidity risk management looks like, what does the interest rate risk management look like? And what does the capital look like? Because you can plug a temporary liquidity hall with borrowing that the Fed's doing, and that will keep banks from having to sell the
securities that they own. But if those deposits are gone forever, if there's a shift in the industry from the smaller banks to the larger banks and it remains permanent, then that's a problem for the smaller bank portion of the industry. Basie, this was wonderful. I'd love to do this again ahead of the next FET decision. Thank you, all right, Bessie to thank you the former fat governor. The next guest is really someone with tremendous experience both from the Treasure Department,
World Bank and also in the banking industry extensively. David Malpass, who is World Bank Press, joining us here in our studios. I want to start because a lot of people who draw parallels to two thousand and eight, and given your experience there, you were chief economists, top rated economist at bear Stearns. Are there parallels to that moment and the one we're in now. I think there are parallels and differences.
The parallels are there was really a maturity mismatch at some institutions, and the FET had been raising rates, remember a long period of rate hiking leading into oh eight. But then some big differences. One is this time the discount windows available to the major institutions. That wasn't the case then, and so that gives some backstop and you're
seeing it really play out now. And another big difference is the FET itself is buying a huge amounts of duration and other central banks are as well, ECB and Bank of Japan are holders of giant amounts of duration, which wasn't the case in two thousand and eight. They at that time, remember, central banks only only owned treasury bills. So that creates a different complexion to the market and a different set of tools that the regulators have to intervene.
So today I think the biggest shoe is where is growth going to come from into the future. Before we get to that point, I know you want to bleed that over into the rest of the world, which is an important point. I want to talk about the similarities. You talk about a liquidity mismatch. A lot of people draw the distinction a liquidity mismatch is not a credit crisis is not a credit crunch. But back in two thousand and eight, and actually I would argue earlier, the
liquidity mismatch led to a credit crunch. How close is that sort of direct parallel? This sort of direct bleed over into credit conditions. As interest rates are held down, which was the case in oh four, oh five, oh six, and now in this current or over the last ten years, then that causes asset prices to go up. So there's a workout period after that. So I think that's what we're in now. How do you adjust asset prices if yields are going to be much higher than what you
thought two years ago or one year ago. And that's the challenge facing the market. How do you allocate the losses? I'm hoping that they don't go to the poor, to developing countries and to average taxpayers. That an issue is if you've created all that asset price boom, can the losses be allocated back into the same markets? And that's
a big challenge. So could you elaborate a little bit on the disproportionate holding of the burden that you see in some of the developing nations that may affect the growth profile of the world. Over the last ten years or so, there was this big concentration of wealth in and narrow group in the advanced economies that was fueled by both the fiscal deficits, the huge run up in the debts across the advanced economies, and also the central
banks themselves buying duration that supports asset prices. Long term assets go up when there is a giant buyer constant buyer of those assets, and so that leaves not enough capital elsewhere in the world. We've seen the slow growth in developing countries in part because there's not good access to global capital markets. And now going forward the challenges. A lot of the world's capital is going to be used by the advanced economies to keep rolling over the debt.
So a big challenge for billions of people around the world is where is there going to be available capital. They have this big population growth in many countries, and yet the capital goes to countries that have declining populations. So how much does that lowerer projection for global growth
and how much has that lowered it? Even over the past couple of months, we had lowered it substantially a year or a year and a half ago, recognizing that there was inflation really was a challenge that the central banks were going to be raising. Cost of capital goes up, so growth forecasts go down. So in the latest what we've seen is advanced economy growth expectations had gone up
some late last year. That's the US and in particular as China lifted the embargo, the lockdown, and so as we're looking at it now, the growth is slow but positive in advanced economies, but in developing countries not much investment taking place. That I think is the big challenge.
I'll be giving a big speech tomorrow at CSIS in Washington, DC on the importance of private private capital enabling How what are the tools and techniques and the world banks in the middle of it trying to get countries to be more attractive to capital investment. In the meantime, would you get this FED decision later today? How does that connect to the stripping out of capital from some of
the developing world. If the FED does go ahead and high rates by twenty five basis points and increase their forecast for where the terminal rate ends up, what kind of magnified effect could that have? I heard you talking before they'll be sending signals of the What the prospect is.
I think import is for the US and the advanced economies to think about how do we encourage more supply and that brings down the inflation rate, So central banks can be more involved or recognized they are affecting the lending that goes to small businesses, and so are the ways with regulatory policy or with the bond with this duration purchasing that the central banks do. So my view is that when central banks by duration, that actually ends
up slowing growth on average. You know, if you look back over the last ten years, there's been this anomaly that they're buying huge amounts of bonds and yet you're not getting the growth rate that you expected from that. So going forward, I think there has to be a really deep dive into how do we get more growth and capital allocation worldwide? Until then, given that all things being equal, a lot of central banks are turned to the same playbook and you're actually the balance sheet we
expand in the US, how slow could global growth get? Yeah, I think it can be even a recession, and that's not off the table. The last recession. You could have a global recession. We define that as when the growth rate isn't equivalent to the population growth rate, so you have people moving backward on average um. That depends a
lot on the big on the advanced economies. The US is the is the by far the biggest economy, and so it's growth rate matters, and so you people are watching exactly what's going on in the in the Loan Officer survey, for example, there was just a reference to that on your show. That's that's an important one our banks lending given that they see this, uh, these difficulties. So all things being equal, are the chances of a global recession much greater today than they were two weeks ago? No,
I would not say that there was. There was a recognition of individual bank problems. They were strongly dealt with by regulators. So the bigger issue rather than looking at the near term impact, I think we have to just stay with the idea of what's going to be done for the next three year growth rate of the world. How do you get out of this kind of trap of higher and higher interest rates? And I think the
solution has to be more output. How do you how do you how do you get more services, more goods into the global markets in order to stop the inflation trend. Given that, what do you hope j Powell does today? Huh No, he's the policy makers to send very strong signals. Well, I'm sure, and I'm sure people will read into them. And why are you in New York? There's a big UN conference today on water. Water is really important, clean water for people, it helps children grow to their full height,
and it helps agriculture be able to produce. So big conference on that, and I'm also doing other other Vince in New York. David Malpass, thank you so much for being with us. We really appreciate it. David Malpass, the President of the World Bank. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In, and the
Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg terminal. Thanks for listening. I'm Lisa Abramowitz and this is Bloomberg