Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you insight from the best and economics, finance, investment, and international relations. To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot com, and of course on the Bloomberg terminal. We've got to start with this one right here, though, Patrick Harker, the
president of the Philadelphia Fed. Mr President, I think you've got a good slot because about an hour ago it was much colder than this. Good morning to you. Let's get straight into it. Forget about the weather. We've got a beautiful backdrop. I want to start here. As we sit here today. The biggest risk today is it doing
too much for you guys or doing too little. Well, I think what we need to do is just act, and we're acting, and so I think we need to move and need to move methodically toward a clearly restrictive stance, which we're doing. And then in my view, then we either pause, depending on the data, We're gonna have to see how this plays out, we get to above three point four. By year end, we're at or above three point four and then we see we have to let some of this play out. We don't have to keep
climbing climbing, climbing. Then it go down very quickly. Let's stay up there and let the economy do its think so for how long? Right? And this is point where he said keep it there for possibly years and see the trickle out effect. We don't know. I mean, we really need to let the data play out. You just don't know. I'll pray Art, what date are you looking at?
Inflation number one? For sure? That's the issue that's headline of four core for sure, because you know the volatile the volatility of energy and food is extreme, particularly because of the situation we have in Ukraine and around the world. This has been this whole set up in the chairman's speech. Don't think of a totemic issue for Wall Street and everybody is gonna be tuning in at the top of the next hour. What's the message that the Fed would
like investors to take away today? I don't know what the Fed has. I can only speak for myself. I think the message is for me that we need to get inflation under control. We will do what it takes to get inflation under control, and hopefully we can do that in a way that does not ruin what otherwise is a good economy. You look at the jobs data, you look at other parts of the economy. We don't want to do this in a way that really just squashes the jobs market right now? Is this whatever it takes?
Or is this Mario dragging whatever it takes? Because everybody on Wall Street wants to know, would you risk recession to bring inflation down? It's possible, It's always possible to have a recession at this point. I don't think it's in my forecast that it's probable. I think we can we can still do this. There's still a path to do this, to have if if there is a recession, it would be shallow and short. In my view, there's two camps. One says get to the terminal rate as
quickly as possible to get ahead of inflation. The other says, move more slowly because you want to make sure that the lags don't bring down the economy. Which camp are you in? Again? Where I am is, let's get up to the clearly restrictive stance. Three point four is a good number. Three point five, and then let's see how things play out from there. This word neutral has been thrown around a lot in the last couple of weeks. You're smiling already, So I talked to me about what
you think neutral is, what's restrictive? What is it? And how do we know it's clearly above free? For sure? How much above? Again? I think we just have to see today's data. We can talk about that we're seeing glimmers of hope, and I emphasize glimmers of hope on the inflation front. We're not done and so we need to continue to raise raids to make sure that those
glimmers turned into a clear downward trend. How do you know when we have a clear down with Trent and clearly, as she pointed out as two ways of looking at this, she keep hiking until you see two percent. That's clearing where you want to go. You want to get to this place where you're restrictive and you're waiting, and you're convinced that we've got this trajectory we're moving back down towards too. I think what we'd all like is just a better understanding of what that world looks like. How
do we know when we see that world? So clearly we have the numbers right, corps and headline. I also look at the distribution of inflation. That's how many goods and services are about five percent, about four percent. As we see that distribution shrinking at you think about the beginning of the pandemic was all about use cars and some other commodities. Let's start to bring that down because right now it's pretty widespread. That to me would be
a clear sign that we're making progress. Financial conditions are an important mechanism for you to get your policy into the economy. Would you say we've seen an unwarranted easy financial conditions through the summer. I don't know if it's unwarranted, but we need to continue to do what we have to do with respect of the Fed funds right which we've committed, But clearly financial conditions would need to be
tighter for you to achieve that. Well, no, let's let's talk about the housing market, and we've already have a very tight We already have a very tight housing market, so there already is progress being amazing comfortable. You don't believe it's a disconnect between what you're saying as a committee and on what you're saying plant and Finance. Not yet, Not yet. I mean, it's something clearly watched, but I'm
not worried about it at this point. Unemployment, you're expecting that to rise a little bit, that's the Fed's message. But the same time you're saying that at three five percent, it's below the natural rate. So how much of a rise is acceptable to you? And what do you say to the people who say, yeah, it's just a tiny rise, but it was my job. Yeah, I know. And that's
what's difficult. And this is the balance, right that we have to try to find because we know inflation hurts the lowest income people in our country, and because of losing jobs, it hurts those people the most too, So we have to find that balance. How much higher it's hard to say exactly. I'm not in the camp of it being necessarily at five. We're going into this with
an incredibly strong job market. This is not like other situations we've had historically, so I think we don't have to see a rapid rise in unemployment at to get inflation on the control at this point. So Adam pose it was on earlier and he was talking about how there has to be an acceptance of perhaps three for a longer period of time that yes, maybe the trajectory has to be okay, but that has to be a tolerated inflation rate. Do you think that that's appropriate given
the concerns about unemployment. So I think what's most important is we keep moving toward two exactly the pace which we get to to. I'm less worried about that, but we keep moving forward right and get to a position where inflation is consistently going down. That's the most important thing. See do you not buy the argument that if inflation remains above a certain point, regardless of the trajectory, for a long time, it gets into the psyche of Americans and then they start to sort of have a self
fulfilling prophecy inflation. You don't believe that the number one risk is getting inflation expectations on actor. We cannot let that happen. So so far it's not happened. We need to continue to act and make sure it doesn't. So are you watching the University of Michigan one to five year or five to ten year forecast? Is that's sort of the key data point all of the above. You look at all the above, whether it's the new York Fed survey or tips markets, you know all those measures.
What's the response function to that? Doing what we're doing right now, continuing to move rates up methodically to get inflation down. Period. You mentioned the consumer. When you look at the economy these days, what do you see? We got the PC numbers today, The inflation data were great, wages and salaries were great, but spending was weak. Well that's a bit expected. Right as we race rates and we're trying to slow demand, you would expect that spending
would come down. Are you worried about recession? I know that you say it doesn't have to happen, but what do you think the odds are? And uh, is there any way to foresee it given the unusual nature of this recession and recovery? Um So at this point it's not in my forecast that we'd hit a deep recession, not at all. Short and shallow is something we keep hearing. You mentioned four minutes ago, twelve months ago, the buzzwords. You know what that was. I won't mention it because
it's like toxic around here. Bell Rings ejected. That was clearly a massive failure and it wasn't unique to this central bank. A lot of people were sat on this program a million times. We discussed it with Mike McKee a million times. Was also a story that played out
abroad and then didn't materialize. Do you worry that we're doing that again by having this conversation, because I can tell you President Harker, every single day, short shallow, short, shallow, it's all a here, It's all we hear every single day. Do you think we could be getting this wrong again? I'm not sure that we'd be getting it wrong again. What go back and what did we miss? I think what did I miss to where we were not enough emphasis on the soft data in a situation is changing
very rapidly. The data is lagging, and in particular, it's lagging in those quick change moments. So more emphasis on the soft data is really important. What we're hearing from our context is the soft data. They're starting to see supply chain constraints ease a little bit. They're starting to see some relief when it comes to hiring. Not everywhere, but in some cases there's so but and they don't plan on laying people off at this point. They worked
very hard to get the people they have. They don't want to let them go. So I think in that situation, I'm not sure that we're mischaracterizing a short and shallow potential and emphasized potential recession. As you said, though, the cyclists move very quickly, and there's a feeling that the post financial crisis communication architecture of this Federal Reserve, how to you back in the last twelve months, what needs
to change? I think we need to keep emphasize thing that what we know, what we don't know, what we can know, what we can't know, and act appropriately. I mean, people want to level of precision in a situation that we're in where we keep getting hit right issue after issue as now it's droughts globally right that where it's just impossible to put that level of precision on these normal Would you like the dot plot to be thrown into the trash? Would you like to see that gone?
I think we need to continue to communicate with the American people about what are our views on the beauty of the FED is we have a diversity of opinions and that's you see those in the dots. President Harker of the Philadelphia FED, thank you, sir, that's good to catch up. The key I know you've said it a few times. Is that something you'd like to see gone
out of the summary of Economic projections? Well, I wouldn't speak for the FED, but I can tell you Wall Street continually misinterprets it as a plan rather than nineteen individual forecasts. It's something that the chaman often sometimes leans on, when it's when it's good for the chan to lean on.
Other times it's something the emphasizes. You know, it's such a tricky moment right now, because when you talk about the data dependency, I just keep going back to two one and how the data was wrong, How when it got revised in the job's formation, it showed this incredible strength that hadn't been foreseen in the same kind of way.
So how do you remain data dependent and look for that trajectory if it's so noisy and we're dealing with so many different and unfortunately for them, it's the only tool they've got, it's the only thing they can do. So they can't do They can't say, gee, we wish
we had the revised numbers yesterday. GDP gets revised up and goes domestic income is positive, and that makes uh, those two things, don't data there's something clearly wrong with the measurement right now, given that gap between GDP and g d I. President, how can it's fantastic catch Howe
you said, this is Blindbeck, we walk them immediately. Here the gentleman from St. Louis in Indiana University, James Bullard, joins us with all his effort over the years, and particularly his research effort a bit ago on regime change that had a profound effect seven eight, nine years ago. And there's a new phrase from Jim Bullard right now, we'll get right to and that is the phrase of
the moment. Fronting Jim Bullard, what is front moding? I think we wanted to pull the rate increases forward in time because the inflation that we got in to exploded onto the scene, so we had to move more quickly than we would have historically. Um, but that's appropriate for this situation as we're coming out of the pandemic and we've got uh, you know, a lot of fiscal policy,
a lot of monetary policy during the pandemic. One of the questions that Waltz he has had after Chairman Power has spoken in the past is he said that, uh, at some point it's appropriate to slow the pace of increases, and they take that as devish. Others push back and say, it's not how fast we do it, it's where we go. Uh. Do you agree with that that that the pace doesn't really matter as much as what the term pace matters
a little bit? You do have to get to the level of the policy rate that will put downward pressure on inflation. Now, and we've been able to get some download pressure on inflation during the first half of this year. Most of that came through market pricing, not through the actual level of the funds rate. But now you have to follow through and get the funds rate to the to a level that's defensible that you can say, hey, I'm I'm putting downward pressure on inflation. We've got an
EID handle on headline CPI inflation. Uh, this is more inflation than we've seen in forty years. We've got to
get the rate up well. The concern that some members of the committee have had is that as you it's been market pricing, it's not the full effects yet of the tightening, and when that hits, the economy may be weak, and then you're doing a disservice by sending us into you know, long and variable lags something uttered by Milton Freedman, but that was based on data from the fifties and sixties. I think today's market, it's partly because of media like this.
It moved very quickly in response to projected paths of policy. And I would site as exhibit number one the housing market, which has already slowed down substantially in the spring here, and it started to do that before we even made much of a move. We would only move twenty five or or made one or two moves, and and hadn't even started the battlestreet runoff. So I don't think this long and variable lags thing is as accurate as it
might have been historically. I think you're getting a lot of the impact now, but we can't just rely on markets. We have to get our rate up to the level that will put down the pressure on inflation. I've said three point seven, five or four percent by the end of this year. I'd like to get to that level, and sooner is better as far as I'm concerning, A lot of people have said neutral is higher than Chairman suggested.
We were there almost at two and a half percent, but the inflation is making that that's a long runner that's a long run neutral that that you can read that off the summary of economic projections, and that's if the economy is on the balanced growth path, inflation was at two percent expected to remain at two percent, then that would be a logical level for the policy rate then. But that's not where we are today. We've got all this inflation and we've got a very strong labor market.
So that's why it makes sense to go well above that to a recommended policy rate that's well above that has that longer run neutral point. Change for you is that how to lift Do you think we go back to the old world, the pre pandemic world of low inflation, low growth and a lower long term neutral rate. What are we going towards? Uh? You know, I don't like to get wrapped up in this because this is the
thing we know the least about. So it's good to think about it and it's good to project about it, but we don't really know where the where this everything will settle out, let's say five to ten years from now. But you know, you've got this a media problem now where you've got the inflation today, that's where you got to fight your battle today. Can you tell me what
ballets sheet reduction fits into that. We've had numbers like a trillion dollars bantons sheet reduction over the next twelve months. What is that to you in terms of tightening policy? And how does that complement your thoughts? Somewhere right should be? And I think it's uh, it is a compliment to the rate policy. Um. I'm hopeful that we'll get uh. And I do think that we've gotten some downward pressure or upward pressure on longer term interest rates through this channel.
I think that econometric estimates are you know, all over the map, they're they're very wide. UM, so we'll we'll see. One thing that I think maybe pretty effective here is that this is a global quantitative tightening and so you've got many central banks moving in the same direction here, all at once. That may push longer term meals higher and help us keep inflation under control globally. St. Louis Cardinals, who had a spectacular August. There's no question you're looking
like the best team in baseball right now. And they've got a manager who is unique, young and different. He has a communication strategy that is original. What's the next communication strategy for the FED? Is there too much communication? Though? Uh? I think we do a great job because I think it's good to have a big committee. There's information is coming in and continuous time. If you'll appreciate and uh, and you have to react. Markets want to know, well,
you know, what do you think about? What do you think about that? Dade twice in this conversation blame the media for the mess word. We asked President Hawkin whether we should get rid of the doult clock. Do you think we should? I've felt that we should do something with the dot plot, but we haven't figured out what to do. I have talked with you guys about stepping out of it. But I don't like the emphasis on let's say, three years from now, here's where we're gonna be.
The information content of that is close to zero. So I don't think we should pretend that we're saying something when we don't really know. Uh. And we should probably keep a shorter term about, well, here's where we think we are here. If you have pools up to the lunch room at the St. Louis Fed, you know, in his retirement, can you have this surveillance team come out
to celebrate that. Okay, you think he's gonna hit I don't know the the the home running hit the other day pensioning in the third inning was extraordinary, that grand slam. What's the grand slam Sherman Paul has to do before the September meeting? What is the communication strategy he needs to do to hit a grand stand? Like the gentleman, I think he'll do a great job in this speech here. Um I I haven't seen it, so I don't know exactly.
What would you like to just single sense you like I just said, I don't know what, but he'll do a great job with it, and it's a it's a great opportunity and he'll use it effectively to UH to lay out the committee strategy. Very diplomatic there than if they St. Louis Fed Right now, we have with us, of course, Atlanta FED President Raphael Bostick, who has provided the intellectual leadership for the region and has really been vocal recently about what's going to happen in September. And
that's where we have to start. Where you said recently in a recent interview, that's it's a coin toss between fifty and seventy five in terms of how many basis points you HiPE. What will determine that coin toss for you? Well, for me, it will be the data that comes in over the next couple of weeks. You know, PC today is actually an important one showing the economy is slowing
down in an orderly way, which is helpful. But we also have a job report that's coming in I guess a week from now, and then ten days later we have the CPI. I think the three of those together will start to give me a sense of the big story about how the economy is responding to our policies and also just the changing dynamic. And and if it comes in strong and start strong, as if there's no change,
I'll probably be leaning seventy. If it comes in slowing like we've seen today, it's the first piece of evidence I'll probably lane your fifty. Okay, So is there a certain threshold with the jobs data in particular that you're looking for because you mentioned that we saw a pretty a pretty elevated number the last time around. How is that going to inform you what's sort of the cut off that you're looking for there? Well, I don't know
these things. There is some art here, right, So it's not if it hits to seventies seven then I'm good, right. I do think that you have to think of out this as you know, what does the jobs number tell us in terms of trajectory and the jobs. You know, the economy has been producing a lot of jobs on a monthly basis, food people a month, and that's a
lot um. I think we want to start to see that slow, uh, And that would be consistent with the idea that our policies are starting to take demand and pull it down and reduce that in balance that is underlying, uh, the inflation that we're seeing. So that's kind of what I'm looking for. And and we'll look through it to see if there are particular sectors where there are movements that would suggest that that there is some some some
help that's coming in terms of the demand side. There are thousands of traders on Wall Street who are turning blue now because they're holding their breath waiting for the chairman speech. And I wonder, given the disconnect that we've seen between Wall Street and the Fed, and the fact that financial conditions have lucied, what's the message that you
would like them to take away from the Chairman's speech today. Well, I think the message is inflation is high, Inflation is too high, and we're going to do what we need to do to bring it down. And we're going to be resolute in our policy to make sure that that inflation is well on its way to our two percent target. And I think that is the basic message. Um, we've been saying that already, right, So that's not a new message,
but it is. It is important for us to be continuing to reinforce that so that there is an uncertainty about what we're going to do. You know, we were still in the pandemic economy. I try to remind everybody that. And one of the things that's been true is that, uh, there's the unexpected has happened repeatedly, and so I would like for our policy, and I think my my colleagues
share this, to not be contributing to that uncertainty. We want people to understand sort of what our action function is and what we're trying to get to, uh, and that we're not going to bounce around. We're going to be stable, resolute and sure about where we want to begin. Well, are you willing? In Wall Street parlance, to be vulcan to let the economy go into recession if you need to focus more on inflation, bringing that down because the
costs are higher. Well, you know, inflation is extremely high, sort of unimaginable. The levels we're at, we're unimaginable eighteen months ago, and so we have to get that under control. That's job one. That's our top priority. Beyond that, you know, if if we start to see weakening in labor markets but inflation is still too high, we've got to get inflation down, like that is the first thing. So, um, I'd be comfortable with some weakness in labor markets if
we start to see some job losses. But to be honest, we're far from that today. Right, There's a lot of momentum in terms of job creation. And so I'm going to focus on the next month and the month after that, and you know, I think we won't have to face a question like that for quite some time. Well, put three questions together into one about the terminal, Right, what do you think you need to get to, how fast do you need to get there? And then how long
do you leave it there? So that's three questions and once right, so you do well and I'm supposed to do this. I know we don't have You've got eight minutes to at that time. So so for me, I think I want to see our policy get to something that's marginally restrictive. I think right now we are still in a somewhat accommodated state weekly so I'm looking for us to move maybe a hundred basis points, maybe undive basis points from where we are. In terms of that movement, UM,
I'd like to get there sooner rather than later. I think that the sooner we get to that that level, the faster and the more dramatic our our impact will be on the economy. But I also want to do it in an orderly way. I want to get to that term right, in an orderly way, so that the markets and businesses and families don't think that our movement is suggesting there's some underlying weakness or something unexpected that
it's going to make people be concerned. And then in terms of staying there, um, I think we should stay there for a long time. And I would say I want to see, um, the signs of the economy slowingly be clear, but also start to see inflation uh really moving down to closer to our two percent target before we contemplate sort of moving at all. So you know, the word I'm using a lot is resolute. I think once we get to that level, we want to be resolute in and our goal, which is to get inflation
down to our target. I've got to watch this because you mentioned a time you said a long time. What's a long time? It could be five days ask the question, right, So so for me, I think what what my team has told me and what we've seen, uh historically is that it takes a long time for the actual inflation numbers to move. The economy has got to weaken in a lot of ways, it's got to slow down, uh, and on some level, the inflation number is the last
number to move. And so what what I'm where I am right now on this is from a typical perspective, we would expect maybe eighteen months two years for that trajectory. But at the same time, if you look at how financial markets responded to our policy when we started moving in March, it moved much faster than we've seen historically. And we know that in the pandemic, the economy has evolved faster than we expected historically. GDP responded much faster
than the analysts were expecting at the outset. So there is the possibility that the movement in inflation could be faster than what we've seen in the past. The reality is, we don't know what's going to happen, right, and so I want but I want people to know that we're really focused on the goal, and the goal is to see that inflation hopefully goes faster. But I can't say that for sure, So we're gonna just have to wait
and see. I think what we all need then it's not the crystal ball is just a deeper understanding of your reaction function, and we kind of danced around it just a little bit. Can you help me understand the following. If the mandate is in conflict at any point in the next twelve months, if inflation is still too sticky, but the growth side of things, the labor market starts moving in the wrong direction, do you need to tolerate that to get this lower? Is that something you're willing
to tolerate. Sure, we have to be open to that as a possibility. Look, if if inflation is far from the target UH and labor markets and and employment are is relatively close to target or on target, someone said we already overshot the target. We should be willing. I would be willing to see that employment, those employment numbers moderate to get us either back to target if we've overshot, or maybe a little further away from the target. But
that further away now, it's still extremely close. And so so my concerns in terms of our mandate are not very heavily weighted in on the labor market side, much more in inflation. There's a belief that seems to be embedded in markets that we're going back to what we knew ten years ago in terms of inflation being low, growth being slow, and that just sort of being the normalcy, and that rates will eventually go back to what they were accustomed to. You know, say back then, do you
disagree with this? I mean, this is one of the fundamental questions. Are we in for a a sea change and how much inflation there is globally and in the United States. Well, I think that that's an interesting question. I actually think it's an open question if you think about what's happened through the pandemic, where we've just we've discovered that supply chain strategies where you're relying on just one supplier, increases exposure to volatility and outcome and outputs.
Um businesses are changing those strategies. The ones I talked to, they say, look, we're we're no longer going to rely on just one supplier, that lowest cost provider, and we're going to do this across a number of different suppliers. That in and of itself means we're going to have higher cost basis. There's gonna be upward pressure on prices that we're going to have to embrace. And so there's a lot of other things that are that are going on in the economy. So I said, it's very difficult
to project that. And so I would say, I think inflation is gonna mind it being a little higher than what we've seen historically. How much higher and is it going to be a material? I think that's still that We're just going to have to let things play out
to understand that. So going back to John's question about how long, and you said, you know it could be typically it was minutes two years exactly, Why don't we freak it down five days a month or you know it's been eighteen to two years, could it be much longer than that. Could it be that the new FED funds rate eventually evolves something closer to three to three and a half per said? Is that something feasible? Not just could, but is it feasible in your framework? Well,
I think it's possible. But a lot is going to happen between now and when we get to that place to where I'll be able to have an understanding or a sense of whether that's a new permanent and whether there is some new kind of floor that we're going to have to push to. But I don't know that now. Um. You know the thing that's been helpful, like conversations like this are actually quite helpful in making me be sensitive, sensitive about what sorts of things we need to be
focusing on. Me and my team need to be focusing on as the economy evolves in the next couple of years. So I know they're watching this, so this will be something that shows up on their on their list of things to do over the next six to twelve. We've got about naughty six is left. I want to squeeze this in because we we had it the discussion with President, but out as well. Let this balance sheet reduction fit in. I guess so many questions from bloom Bag subscribes about
this almost every day. What we're talking about this more? What are we're talking about this more? Where does it fit in? Well, you know, I think it fits in as an additional two of the policy, and the reduction of the balance sheet will have sort of a more restrictive impact on how the economy evolves. We are very early on in the reduction of our balance sheet and we're still ramping up in some regards to get to a level of um that we can start to reduce
much faster. For me, I think that it is another factor that allows us to say, the economy standing on its own, it doesn't need these additional supports. Uh. And so the energy in the marketplace is just less uh And and that's kind of how it plays out, you know. There, I saw the segment you did with with Jim, and you know, trying to come up with a hard estimate about you know, you know, a hundred billion dollars, what
does that translate? It's very difficult, but I think it's unambiguous that there's less energy that we are contributing to the marketplace. Uh. And that means that that the ability for the economy to grow faster. It's just been a weekend. We've got a guy, But I'm telling you're not going to watch some real football in Atlanta. At some point you're gonna make it happen. This ace bloom bag. There are people that are signposts along the way. There is
research where you stop and you say, oh. And that was a number of months ago with Priamzra truly one of the great calls of two thousand twenty two on the dynamics of the yield curve. Global head of rate strategy at TV Securities Prior readjust here off of the Powell's speech, readjust the dynamic between the short term two year yield in the benchmark tenure. Sure, thanks for having me. I think the front end is all about new dum Foot policy, and I think we got a few clues
from Chapal's comments today. You know, he's he's acknowledging that there's there could be pain ahead, and that suggests tolerance for pain, I would argue, so also talking about being restrictive for quite some time. So this idea that the FED will take rates up to terminal and then quickly cut rates, I think he's pushing back against that. So that front end, I think it is still biased higher
in rate. We're looking for two year rates to continue to rise, really getting close to that terminal level, so you know it's at three seventy five or something in that range. The long end. I think the long end is a lot more anchored because I don't think long term neutral rate is a whole lot higher the long
run neutral rate. There could be a higher short term neutral rate, but the long run neutral rate, the fact that global growth is going the treasuries are still the safe haven acid if you're in risk asses right now. The Feds just telling you that that put is much further away. I think long end treasuries are actually a safe place to be end. So I think that flattening bias here continues. The curve keeps inverting. The long end I think is much safer than a front end. That's
all a function of inflation later. The fancy word for pointing, the fancy word for pointy is stochastic, and curven versions are almost always in every case stochastic. Do we have to get used to this? If we have a longer fed regime, Are we going to have longer deeper curve in version. I think inflation is what is likely to make this longer. The fact that inflation is just inherently
more sticky and a lagging indicator. I mean, growth can be slowing, inflation might be the last thing to respond to it, and the facts telling you that it's public enemy number one. So I do think that the inversions that historically have been short lived because inflation has not been a problem, and so the Fed has the flexibility
to respond. They're telling you that if inflation doesn't decelerate, that dual mandate is very lopsided, and therefore a period of sticky inflation will mean that that inversion, I think lasts for much longer than the markets pricing in or
or that you know people are looking for. Given how they're setting up the reaction function here and given how little the market seems to be listening to them, how do you think this market would respond to a bad labor market print, a bad payrolls print on September two? So define which market? I think there could be some risk assets that could be actually comforted by a weaker number, because then that might mean the Fed may have to respond and may not hike as much I would actually
argue would be risk negative. I think bad data is bad for risk assets, and you know, and and and treasuries. I think it's it's good for long data treasuries. But the front end, I think chap ill is telling you, well, you know, we're gonna have to tolerate some pain. Inflation is still the data print that I think the market will respond a lot more. I think sensitivity will be
higher to inflation because that's what the Fed's watching. A weaker payroll report, If it means a weaker wages down the road and ultimately weaker inflation, I think it can allow the FED to slow down, but not with inflation
running as high as it is right now. So I still think that CPR report, unfortunately in another blackout, is probably the lynchpin for the seventy five or fifty, And we didn't get much from j Power, But I think they're trying to move us out of just the pace of hikes to that end point and how long they
stay there as ultimately what will tighten financial conditions. Priamzra we are in Jackson Hall talking about the FED, talking about the United States, and so I feel a little strange doing this, but we need to pivot to Europe because that is really where the incredible action is, at
least in the markets today. As people start to think about a seventy five basis point Reid hike by the e c B, do you foresee this as actually a real possibility and something that could sustain some of the moves that we've seen that are quite dramatic in the German bond market, in the Italian bond market, and certainly in the euro right. So we're still looking for fifty um now is there a is for seventy five? There is when you're just starting out in the hiking cycle.
You could make the same case for the FED should they have gone the first hike have been seventy five, and the Minute suggests that it might have been had we not had the Russian invasions. So I think it's a possibility. They need to set the market up more. They also need to look at unintended consequences. I think e CV is on a much harder position than the FED because they're dealing with an energy crisis that's only going to get worse as as as winter sets in um.
You know, our thought is that fifty is still a sizeable number, especially for the Eurozone that's been dealing with negative rates for so long, that they would still start with fifty. But I think if they set the market up, they talk about how they're going to address the problem and the periphery, because they're related. You go seventy five, the periphery is going to underperform um, you know that. I think if they're able to set it up between now,
there's still a lot of time. I guess between now and their September FED meeting, it's possible, but that's not our base case. Three. How much of this is resulting from the strength that we're seeing in the dollar from FED policy so far to date. Is that what's forcing us to even be having this conversation about a seventy five basis point rate high in Europe, which was unthinkable
just months ago, right. I think the dollar is responding to the diverging economic environments and to a different central bank reaction function, where the FED has a really strong labor market, you know, the unemployment rate well through nehru Um, and I think that's what strengthening the dollar, creating the issues for the rest of the world. They're going to have to respond. I don't think it changes FED policy.
Are other central banks responding to that type of financially, you know, to the to the fact that they've got an inflation problem that gets worse. Um, you know, yes, and I do think that they're not targeting any effects, but it works through the the effects channel will impact the economy, and that's what the central banks are taking it into account. Absolutely, I'm sure it was. It was an input into the idea of going fast more than
fifty lisa. If excuse me, if Europe, if Europe does not act bald, if the United States keeps on this track, what does Mark McCormick say for TV securities? What are the ramifications of a resilient or even a dollar out of new strength. I think, you know, ultimately there are self limiting aspects to dollar strength. It tightens conditions, starts putting down repressure on inflation over time. So it's not something that can happen right away. There are some limits.
But in the near term, especially as I think the market grapples with the fact that you're not going to get the FED responding to slowing economic you know, conditions on the growth front, the dollar tends to be also safe haven acid, and so I, you know, are we're positive on the doll in the near term with an idea that there are limits and we just have to the markets of forward looking and at some point we'll realize those limits are being felt in the economic channel.
And you know, I think that's why there's a limit to it. But I don't think they're close to that limit just yet. Right let me flip the tables here. I asked the i G and the distress, how I yield people, how they interpret full faith and credit? How do you interpret the price declines the giant historic bear market of say corporate paper and a little bit of a rally recently. How do you interpret the losses that we've seen in the i G market? What does that
signal to you? So, I think most of it is still an interest rate story, the fact that there's duration risk, there's inherent interst rate risk in these bonds. It's not as much the defaultress. I think defaultress because only just started to get, you know, repriced higher. It's the fact that interstrates have risen. Born funds have seen significant outflows. So it's a supply demand issue for IG corporate that has resulted in in those higher rates or or lower
prices as you talk about. I don't think recession is still being priced in. So if growth starts to falter, which is actually our call, and we actually start heading to a recession and we see the FED not responding because they're still worried about inflation, I think that's when
defaultress starts to reprice. So you know, it's hard for me to be very positive on even credit here because even though the interest rate we talked about with you know that the tenure is probably fair around three percent here, but that defaultress premium can rise if the economy starts too slow. Now, I think that's the key to watch. A lot of the work has been done on the interest rate front. I just worry a little bit about
the growth side and is that getting priced in appropriately. Prayer, thank you and congratulations again on just an absolutely brilliant cool on this yield curve two stands. Prayer was looking for forty, maybe fifty, perhaps even I d print version than that, and we got forty pretty quickly after those comments. Pratty, thank you so much. Andrew Hollenhorst with us now from City. Andrew,
you're looking for seventy five basis points in September. Did you hear what you wanted to hear from this FED chair? I think when we heard today was really a change in tone more than any kind of new information. And I think that's really important, and that's what we've been highlighting ahead of this speech, the idea that this was an opportunity for the FED to kind of recalibrate and
read message shorter, narrower, more direct. That's exactly what fed Share Powell gave us UM and really didn't leave any opportunity for a devish interpretation. I think that's what's important. So a lot of the phrases were even phrases that he'd used before. A lot of this was verbiage that we'd heard before. UM. But the typical conversation app your FED speak is I hear from clients and I think it was hawkish. Maybe they read something different that was dubbish.
There was just no room for that, and then maybe the kicker was quoting Paul Vulker. So I think it's pretty clear where share Powell is moving here. I think he's being cautious and trying to have kind of a continuous movement towards a more hawkish tone and a more hawkish policy orientation. I think that's all there. When he did clarify, Mike McKee picked up on this, this idea that at some point they will slow down. That again,
that exact language was used at the July OMC. Some analysts took that to me and that they would slow down in September, And here he clarified that, no, there's really still a choice between fifty and seventy five bases points. Is going to come down to the data. Um. I think that Jobs Report LESA was highlighting consensus expectations are expectations around three hundred thousand. I'm not sure that that's enough of us slowing to really say that we have
this under control. We're looking right now at at Nazak, at the slower by one nine percent sage reaction with somewhat tepid and now it has accelerated in terms of the decline. How have we really fully assessed what fed share Powell was saying in the bond markets with the front end going to three point four two, given it in your view, we could get somewhat higher than that in the next year or so. I think it does come back to the data, and I think markets need
to be convinced by the data. So we have FED rhetoric now that's more clearly pointing in the direction of further tightening of financial conditions. It was interesting also that share Powell mentioned the June Summary of Economic Projections when
he talked about that in July. He said that's still a pretty good baseline for where policy is going to play out um with interest rates, And what he said in this speech was we're going to update those expectations those projections at the September eform CE, so clearly keeping the door open here for more hawkish policy orientation. It will come down to the data, and I think the
interpretation of the data. So we saw core inflation that slow in July, maybe going to get a weaker saw after core inflation reading again in August, looking through to the underlying strength and still looks like there's a lot of underlying inflationary pressure that's gonna be hard to get down. Powell mentioned the view around inflation hadn't really changed after that July print, but that's where is the inflation data go. That's gonna determine the FED goes in the market. Andrew,
one final question. If we get to sustain average two thousand nine farm perils, what does that do to the holland Or's call. I think it really leaves our call intact. Our call is that the BED will get rates to four percent, probably this year, move beyond that next year. And I think what that kind of a number would be telling you is that the job market is still creating jobs at a pace that is pushing the unemployment rate lower. And we know the unemployment rate is currently
at a level that's generating excess wage pressure. I think we heard from share Powell and maybe even more clearly from Atlanta Fed President Boston, who you had on earlier, that even as the job market slows, this is a FED that's gonna lead of rates higher. And then in fact they're looking for that slow down in the job market because that's where there's a supply demand in balance. And unfortunately that's something that the economy has to go
through now to bring inflation down. Andrew Hollen host with a big coal for some big hikes still to come from this Federal Reserve of City. Andrey, thanks Obama this tonight. This is the Bloomberg surveillance podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,
and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg