Surveillance: Raising Rates with Citi's Clark

the Bloomberg Terminal, and the Bloomberg Business App. Veronica Clark of course at the City Group, Veronica, not only do you talk about the place of inflation right now, but you say, if anything, you'll be surprised to the upside. What parts of American inflation push us to the upside? Yeah, yeah, when we do our places and forecasts, Yeah, we really do a very detailed bottoms up forecast. And we're still seeing strengthen things like shelter prices. I think everyone could

be maybe overestimating how quickly those still might slow. But really it comes down to those core non shelter service prices. That's what Powell has focused us on. Those can stay persistently strong. Things like medical services, recreation can definitely see a lot of upside there. Still, let's focus on medical inflation. It's such a large part of the inflation pie. What is your year over year forward on medical inflation? Dare

I say it's double digit. I don't know if we'll quite get to double digits, but I think we can definitely see that that component picking up, not even necessarily in CPI data that we're going to get tomorrow, but I would look more for PPI data later in the week. That's what will matter for pc inflation. But you can definitely see that running consistently at five, you know, maybe

six percent, you know, getting closer to double digits. Maybe not quite there yet, though, Veronica, you think this federal reserve can go further? You in a team over a city group. The big question at standing is ultimately, to what extent the banking stress of the last month is a substitute for right hikes? Veronica, Why do you and the team think that what we've seen develop in the last month is contained, that the worst of it is done. Yeah,

I think we're seeing things stabilized now. And it's not that we wouldn't expect no impact on activity or inflation from tightening lending. And this is probably does mean that lending standards tighten more and credit pulls back a bit more. But we should have already been expecting some of that, of course, you know, from from higher rates, and it's

not that you're going to see it immediately. You know, this is much more a second half of the year, end of the year type issue for the broader economy and then for the Fed that you know, the more near term pressing issue is that you'll still have three months or so at least of pretty consistently strong inflation prints, and it seems hard to see a scenario where they're pausing, where we're still running course CPI at point five every month.

Just to frame the current split the divergence, you're well aware that the market is trading well below the FETs dolt fe year end for NICA. You're on the other side of this, you're well above the dolt for year end. Just give me some numbers on that. Why'd you see the terminal write still for this federal se Yeah, we still have that terminal rate at five and a half to five seventy five, So that's twenty five basis point hike in May, another in June, another in July. And

again it comes down to this timing issue. Where it will have tomorrow's CPI report before the May meeting. It's probably a lower bar for them to hike still in May. You know, that's what the dots show. But before the June meeting, after the May meeting will have two more CPI prints, and those look like they can stay consistently strong.

And then at the June meeting, you know, we'll have an update to projections for inflation growth and the dots, and it seems unlikely to us that the Fed will have to be revising higher their inflation forecast and then not still hiking. I think that that keeps them going the markets. Of course, we'll just get their overtime as we get consistently strong inflation data. For this is really important. What you just said there's stopped the show. You and

Andrew are reaffirming a set of rate moves higher. So when you talk to Keith with I mean, I know you're not on speaking terms, but how does your banking team at City Group adapt in I guess the crisis is over, but adapt to flows in banking giving your economic call? How do they adapt to that? Yeah, I certainly don't want to speak for them, but I think

you know the system as a whole. You know, we know that there are these issues, but it does seem like, you know, the fed's facilities are working to control liquidity issues and that if things do stabilize. Well, we know that the FED has all of those other tools to deal with financial stability, but we do still have this price stability problem. And their only tool really deal with inflation is rates. So so where does a money market

fund go? I mean, I don't want you to be a rate strategist for City Group, but if I got the own horse Clark call, I think I'm looking at a money market fund to five and a half or even higher percent, right, Yeah, I mean yeah, we certainly would have yeah, short term guilds going higher. Again, you could see more more deposit outflows, of course, but we were that was already happening even even before the banking crisis. But that is what needs to happen. You know, you

need people to stop spending. You know, you need credit to contract, and that's what slows the economy and brings down inflation. Johnny, you know, I look at this, John, and besides, your compliance officer just fell off the chair. Listen to that. I mean, if you get a city group framework. What does that do to so for Libra all the IRA Jersey stuff, what does that do to somebody watching this or listening to this, to that money market choice five point six five percent, that's not five percent,

that's a bigger percent with a vengeance. Did you go there, so Veronico which you pointed out that would be a feature and not a bug of monasty policy. This is what they're trying to achieve. But given what we've seen develop in the last month, do you not think that would contribute to renewed stress in a financial system? Yeah, it's that's certainly a risk skin We have seen some

of those cracks show up at this point. But I mean I think that for the FED, at least, you know, they would see there all their other tools that they've used, you know, the new facility, the discount window as helping to control those financial stavility issues. And it is a really tough situation. I'm not saying it's a it's an easy thing for them. It could be an uncomfortable a couple of months here, but you do still unfortunately have

an inflation issue. Can we talk about what's developed in the labor market as well, on Friday, what we saw was a really resilient NFPN on fun payrolls print. Once again, we've had a year of those just upside surprise, upside surprise, but I don't think we've had a downside surprise since the March report, which came in early April of last year. For because some people look back to the data of

last week and they're looking for noise versus signal. Was the data before the payrolls print the noise or the signal because we had a string of misses going into that print. Yeah. Yeah, we had some software im readings, We had job openings that came down revisions to initial and continuing jobs. Claims that maybe those look a lot

higher now and are trending a bit higher. I would say, you know, a lot of this data we should still take with somewhat of a grain of salt, especially that claims data there looks like to some seasonal pattern that didn't get worked out with some seasonal factor revisions. And I would say, you know, all of it is consistent with you know, an economy that should be slowing but but certainly is not you know, headed off a cliff

into an immediate recession. But we should be expecting, you know, ism services in a fifty fifty five rage, we should be expecting job openings to be coming down. And I think you know the labor market data of course on Friday, it is still a very strong labor market. The unemployment rate is still very low. It looked a lot like

a twenty nineteen kind of jobs print. But when you're running core inflation that's pretty consistently at five percent, you have to be worried that, you know, a tight labor market like that will just add to the upside risk for inflation. Ironica, this was quite as a white four o'clock. Then I've a city working alongside Andrew Holland Hoist with a col F effete to take rights to five fifty.

This is an extremely important conversation because of the number of narratives in Washington and all my years of doing this. The spring meetings of the IMF and MOROCCO later this year in October, there's five six. It's like it's like Howard Johnson's years ago. They're twenty eight flavors of narratives and where we're heading. A student of this is Douglas Rhdicker managing partner International Capital Strategies, but far more and a former executive board member of the IMF and affiliated

with democratic politics in Washington. Doug, thank you so much for joining us. You're advass or a million years ago and you're sitting there and they go, look, I am F. There's two narratives. What happened? Why do we have fourteen narratives now? Oh? Look, I don't think you can start with the IMF of twenty thirty four years ago. I think it's a completely different institution I think right now, and it has very little to do in the IMF and more to do with the world. So I guess

we're better off if there's not one overwhelming crisis. If you go back to the Greek crisis, the Euro crisis, COVID, even in Russia, Ukraine, those were dominant themes that squeezed everything else side of the room. I guess, if you want to look at this through rose colored glasses, the fact that we have multiple different narratives is probably better

than we're all overwhelmed by a single one. That doesn't mean any single one of those is easy to resolve, or the week is going to come out with anything that is concrete, but at least it's better than one thing that everybody's focused on because it's existential. There is in the financial times today and I've been searching for this for three years, folks, three years. What's the right phrase for the attitude we have from the Great Financial

Crisis and Russia? Sharma X Morgan Stanley at the Rockefeller Foundation absolutely nails it this morning, calling it the rescue culture? Is that what we're trapped in where every institution goes there could be no pain, there could be no anks, nobody can go out of business. Every deposit's got to be covered. Do we have an international rescue culture? We have a domestic international rescue culture. We have an international

rescue culture, whether it's called rescue culture or an entitlement culture. Yeah, I think everybody assumes that there's a put, some form of put. Whether that put is a central bank put or a fiscal authorities put or an IMF put. Everybody feels somewhat entitled. You've got me sounding much more pessimistic and negative than I thought I would be. But the fact of the matter is, Yes, imagine if Bramo was here walking out, do you think that sense of encondlement

is mispiced. Well, I guess it's well placed if in the end those authorities actually blink and write the checks. Right. So, if the game is do we want to avoid another Lehman? If that's the moral hazard play, then fundamentally, countries believe, countries, companies, investors believe that when things get really bad, somebody, thing, some institution is going to bail me out of the worst consequences. And to date that's been a fairly solid bet.

I don't think it's sustainable, but you know, not being sustainable can be two years, twenty years. I mean there's a long time. Right in the long run, we're all dead. What did we learn last month with re cost to exactly this? Well, so what I think it's too early to know what the long term consequences are of SVB, credit, Swiss, etc. And by the way, I divide the two into totally different camps, but let's lump them together for the purposes of this, which is to say yes rather than letting

unfettered capitalism creative destruction play out. Everything is systemic. You want to know what it is? We learned? We learned it. Everything is systemic. So when SVB is suddenly systemic. It was the sixteenth largest bank in the country. It was not systemic by traditional metrics. But suddenly, when it turns out that your Zoom call might not happen on Monday because Zoom was a big deposit or at SVB, that's systemic. I don't know if that's how we contemplated systemic when

we started there. So if everything is now systemic, is it just implied that old deposits are in short? Oh? Look, I think that both Secretary Yellen and other authorities have gone very far to making sure that they send the message that implicitly yes, but explicitly they don't have the congressionally mandated authority to say yes. So they're saying yes with a caveat, or they're saying no with an asterisk. Yes, but we can't say yes. But yeah, go to sleep

at night thinking and knowing that your deposits are in short. Dog, your work is to combine economics with law years ago, scotton arps and all that. And then Salomon Brothers is well, I am fascinated how you respond to an I am F five year call of economic gloom of global GDP three percent or less malpass came out at World Bank and had a two handle on some form of present global growth. That's not Barack Obama's better America or better global How do we get so negative, so fast, so

entrenched in our gloom? So I have high regard for the economic teams at the Bank and the Fund, and there's a caveat coming. There's a butt. The butt is there's a certain amount of group think that trickles into a lot of this, and so you have desk economists who factor in their individual country projections into the regional, into the WO or the GFSR, and what you end up with is not necessarily a holistic, strategically oriented five year forecast. It's almost bottoms up, to the point where

it's two bottoms up. That's the single best discussion of that. Ever, i'll take it one step too far. Maybe it's the space to make the accusation that some of these full costa political and not Bison economics. It depends on how

you define political. And what I mean by that is I actually think there's a lot of people who are very technocratic, who keep their heads down, who have their pencils to their papers or the equivalent, and they are making their forecasts based on their best estimates without regard to politics. I think there are some other decisions at these institutions program lending, certainly policy choices that are highly politicized, probably more than ever before, or at least in the

last several decades. Let's the dog you're being way to pullite Kenneth Rogoff, who's got a non equates with the International Monetary Fund. Ken's bend borderline scathing that the IMF has become the World Bank. Do you agree, Well, it hasn't become, but it's certainly trending in that direction. I think the current managing director of the ims instincts and experience are much more aligned with her experience at the

World Bank. And I would make the counter argument that David Malpass in taking a harder line on lending to China or enforcing China to the table to be more transparent and more conciliatory towards debt restructure, and has taken a more stingy which would traditionally be seen as an IMF style approach to some of the emergency lending coming out of coaching. Should we make some news? He and you suggested that Joe Gavis should be at the World

Bank and Maupass should be at the IMS. Oh, I would never make a suggestion about personnel at that level when those decisions have already been taken, whether in fact they were the perfect fit for the job under the circumstances that we now have. Let's say, I think both of them have done an admirable job in their current positions, and I wish them the best. They were given a pandemic, we got to remember absolutely, and they were they inherited.

As I say, this China card, which you know, the IMAT traditionally spent a lot of time as it should. It's it's man they dealing with debt restructuring, debt relief, debt issues and emerging markets and frontier markets, and that certainly is something that each one of them has handled in a different way. Tuck, this was great. Should do this more often. We should come down, come down to DC just to catch up with Doug Douglas roddicker there

on the World Bank and the IMF. Let's get straight to Mike Schumach at the global head of macro Strategy at whilst Fargo. Mike, great to have you with us, sir as always good to see Mike. Good morning. Let's talk about the call from City. We'll kick things off there City Ronica Clark on this program thirty minutes ago talking up rates of five fifty to five seventy five on FED funds. Mike, are you in that capital. No?

And at this point, Ian look, the third wants to hike, probably wants maybe twice more, but it's really torn because it's got these VA's troubles and regional banks get into five seventy five seems like a stretch impossible. No, but we're not in their camp right now. At the moment, the conversation shifted, Mike has gone away from how father fed will go to how Father'll have to cut back. Mike. The IMF putting out its research it's outlook, suggesting that

rates will return to pre pandemic levels. Mike, would you go that now? I look, the IMF's entitled to make forecasts like anybody else. But here's the thing, John, when you think about the dynamics over the last six to twelve months, complete shift in psychology, Inflation still stubborn in a lot of countries. I think that's going to keep rates pretty well above pre pandemic levels for a long time, so back to twenty nineteen levels, not any time soon,

many many years. Is your macro strategy, Mike Schumacher based around service sector core not coming down? I mean you've got a better view on headline core is somewhat persistent here. What does service sector core do to the Wells Fargo call? Yeah, frankly, time people care a lot about service sector core because J. Powell cares about it. So I'm in that camp too, Mister Powell's important to you, it's important to me, it's important new investors. So we've got core staying pretty stubborn,

frankly for a while. So yes, you probably see some moderation, maybe not much in a couple of days or tomorrow, I guess when it comes out, but fairly soon, but still well above where the Fed wants it to be. So we're all looking at that. We focus on it, but not anywhere near the comfort zone yet. So if I stay on J. Powell, then look at the three month T bill, and then I look at the three month T bill guestament out eighteen months this morning, I

see a very sustained three months yield. Does that drive even higher in the coming quarters. Yeah, it's really interesting time to think about just how much easing the market's priced in. So it's got these two factors out there. One inflation bad FED wants to squel chip that implies more hikes. Number two financial system angst rickety structure, etc. Than apply a lot more cuts. We think there are too many cuts priced in, both for this year and

for next year. The big test is going to come in the second part of this month, a lot of earnings releases. If the system gets past that, I think you'll see the number of cuts priced for twenty three and twenty four go down a lot, and that should push up things like the two year yield. Bring it in close. A managing director of the IMF just emailed me and says, ask Schumacher, what we see tomorrow? Mike Schumacher, what do we see tomorrow on the inflation report? Yeah,

focus on Coral. We've got that coming in at point four percent, and that's probably not going to shock anybody time. But we think about how the market reacts to surprises as well. In in our view, it's very skewed. So let's say Core comes in hot point five point six. We think you get much more of a reaction to a hot print than a week one, because again, the FED wants to hike, and in our simple calculus, the

Fed's going to ease only if something breaks. So Core coming in at point four point five even point three doesn't really change that aspect of the Fed's decision making two banks breaking, John, didn't get it, Dog. That's the question, isn't it hasn't something broken? Something additional? John, So something you've got a huge band aid on it, whether it's Credit SWEETE, whether it's SVB, take your pick. And now it's the question of, as your last guest pointed out,

where is the strike on that put? Is that put still there? Should investors rationally think it is? Perhaps so? But you need to have the least for the FED to come in or the ECB or the SNB another big debacle out there for the markets to become even more unnerved. Well, they immediate concerned with Spilova, Mike. If you drawn conclusions on how much Spilova we're going to see from those incidents really tough to see and quantify at this point, John, SVB, it seems like it's pretty localized.

When you think about Credit Sweee it's a more challenging, difficult unwind. But assuming that deal close is pretty soon, probably not a ton of spillover. But I think the bigger issue is, in particular in the US, you've got thousands of banks in a particular or something like a hundred that range between ten billion and one hundred billion in assets. We simply don't have a lot of visibility

into those balance sheets. So structures right now the huge but collectively, could there be a problem perhaps what Michael keep returning to the question I've returned to them, what are the longer variable lacks of a banking shock? And is it too soon to draw conclusions? If you the Federal Reserve and you sit there on May third, do you have the incoming information, the sufficient information you need to make that cool? No, you don't know at that point.

You'll know if you had an immediate problem that's going to be evident in the next week or two. But there simply is not enough time to know. Is the system really on solid footing right now? A lot of clients talk about things like commercial real estate, where does echo Probably doesn't look that great. Will the fed up that information on the third? No, I doubt it. What about deposit flight deposit beatas how much does having an

iPhone and a fancy app change those beatas well? They get faster, they get higher, but to what degree we can't tell. Neither can the FED quite yet, Mike, John Williams and the New York Fed said, basically, it's not our fault. It's not because we went from zero to four point five five percent in a space of twelve months. We didn't have anything to do with this these incidents maybe asyncratic, Mike, would you take the same page as

John Williams at the New York Fed? Well, I think you've got to focus on monetary policy versus the Fed's regulatory authority, and does it make a lot of sense to have those really embedded in the same institution. We did a call recently with Sheila Beart. She said, no, they should be split to some degree. So monetary policy, yes, it's been aggressive, but frankly, the FED weight a long time to get tough too. It could have moved certainly

back in twenty one. I think that would have helped quite a bit, and it chose to wait the governorship, thank you, sir. So Unfortunately we have to do an audible with John Bolton, former National security advisor to President Trump, Ambassador to the United Nations under George W. Bush. And for those of you in radio, Bolton appears today with arm in sling. No doubt one of the people going after Bolden. What did you do to the other guy, Ambassador?

Did you hit him hard? It was pretty Graham. I have to say, I'm sure it was some Bolton drama there. Let's get to the drama of the moment, and I want to begin with a Wall Street Journal reporter jailed in Russia. You have been inflammatory and said throw the bums out, you want the ambassador of Russia to be removed from the soil of United States of America. Discussed that. Well, look, this is obviously an entirely political decision by the Kremlin.

They're taking this reporter hostage. They're accusing him of espionage. We know that's not true, because it's been a long long time since we've used reporters for that purpose in order to protect them from exactly this kind of thing. Clearly, the Russians want to exchange the reporter for something. We don't know what yet. But I think instead of pleading with him to let this hostage go and he is a hostage and effect. I think we've got to declare

the Russian ambassador persona non grid. I think we ought to go to our NATO allies and ask them to do the same, because it could have happened to any one of their journalists. A strong response is the only thing the Russians understand, and if we don't, if we don't start now, Gershkevich could be in jail for a long time. Best of Bolton, I want to continue this discussion, but because of time in such an ample news flow, we've got to move on, John Bolton, we have an

intelligence lead. This is not Matt Damon, and I know Matt Damon was going to play the part of you in another movie. It's not the Bourne identity, it's not paper under park benches, and that this is your world being affected by digital technology digital media. Do we need

to radically change our intelligence distribution because of new technology? Well, I think there's a lot we can do to safeguard classified material better, and I would certainly say, based on what we know publicly, the presumption at this moment is this is some kind of leak out of the Pentagon or other US sources, and we don't know whether we're

at the end of it or not. It could be more. However, I would also caution at this point that we not draw too many conclusions that this could be an influence operation by somebody we don't know who. And once you get into the world of counter intelligence, it makes being in a hall of mirrors look easy. It's very complicated, and depending on how sophisticated the actor might be, really can wrench your mind around. So we've seen some anomalies

in what's been reported. Just this morning in South Korea, South Korea Time, the government there said that the information that looked to be leaked about about their consideration of selling artillery shells to Ukraine was false. So we don't know whether that's disinformation too. But all I'm saying is, well, I don't have any basis on which to contest what seems to be the case that this is a US league and therefore a huge US problem. I just think we need to be very careful before we jumped to

too many conclusions. Look at this, ambassador. I'm gonna do an audible here, and it's just a general question for the American public, not Republican democrat in your experience, how removed is the intelligence community's process in day to day grind from the way it's perceived by Hollywood. Is Hollywood accurate or are they just off the mark on a movie by movie basis. Well, the Hollywood movies are very exciting,

and some of that does occur. But but you know, we collect the huge amounts of intelligence through what we call euphemistically national technical means, meaning electronic and other forms of surveillance. Frankly, we need a lot more human intelligence collection than we have, and we need a greater clandestine operations capability than we have. I think puritans in the foreign policy establishment have looked down on clandestine operations for a long time. We're in a very dangerous world. Could

we could use a lot more? But it's it's something I think Americans, if they really knew what our intelligence collection capabilities were, would be very proud of what we're able to do. John Bolton, I want to move to the bipartisan thrust of Washington against China. Is it should we be cautious because there's such a fixed bipartisan nature

to our anger over China? Do we overreact? Well? I don't think we've overreacted yet, and I agree with you that there's certainly an unusual character, the bipartisan nature of the concern about China. But I do think the underlying concern is one. I think China is essentially an existential threat to US and the West as a whole in the century, and their challenge is really across the board. It's not just political and military, although it's very much

in those sectors. It's economic as well. Decades of stealing our intellectual property, discriminating against foreign investors and traders, manipulating the international financial system to its advantage. There's a lot that's gone on for a long time we're just really beginning to appreciate and catch up to. So I think the bipartisan concern here is warranted. Among others, who's talked to James Stravitas, of course, the former admiral about a

Pacific Rim build out. I know that the United States has a new dialogue with the Philippines among others. Does Bolton suggest that we need to rebuild out our military in the Pacific Rim, not just for Taiwan, but also for the South China. See, I think we need to rebuild it across the board. I think the next American president needs defense budget increases in the range of what

Ronald Reagan did during his presidency, maybe even more. I think that implies even greater cuts to domestic expending to get our deficit down. But let's be clear, we've been asleep at the switch for a long time here. The going back to the end of the Cold War, people said it was the end of history. We had a peace dividend. We've got to put all that behind us. We face a very wide range of threats. Let's just take the Pacific. Get a map out that has the

Pacific Ocean in the middle of it. It's a long way away. We need probably fifty more naval war vessels in our fleet just to deal with the Pacific, let alone increases for the rest of the world. John Bolton, what's so important here is those of us of a certain vintage remember our intelligence misestimates of the Soviet Union. Do you have a confidence in our intelligence of China? Or do we make the same gauging misguiding that we did with the Soviet Union? Do we know what we're

talking about with Beijing? Well, I think we've got pretty good estimates on key areas. Some of it's visible to

us already. Their capabilities for offensive cyber operations, for example, the military build up that they've undertaken in anti access area denial weapons to push us back from the western shores of the Pacific, Their anti satellite weapons capabilities to blind our eyes in the sky and time of crisis or conflict, that is out there, as is the evidence of things like weaponizing what otherwise look like commercial companies

Wahwei Zte. They're not telecommunications firms. They're arms of the Chinese state trying to take control of fifth generation telecommunications. John Bolton, thank you for joining Bloomberg Surveillance this morning. Former Ambassador Bolton, of course, is work with the National Security Council as well. Always Controversy. 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.

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