Surveillance: Rapid Recovery With Hatzius

with a strange phrase called mortgage equity withdrawal. He brought market economics to a complete stand still by figuring out the flows of our housing market long ago and far away in a boom. He is the Golden Sax Chief Economist and head of Global Economics. John. We're riveted on the FED meeting today. John's going to go to that, but I need to go to you on this boom economy. You and I have never seen. How does a boom economy? How do you perceive? At Golden Sacks, did eight percent

g d P fades away? Will it be abrupt or will it be far more gradual and prosperous than we can imagine? I mean, the eight percent forecast is for the fourth quarter, and the fourth quarter number in two thousand and twenty one, and that's the way the FED looks at these numbers as well. We think they will obviously upgrade their forecasts sharply as well. We don't think as high as that, maybe a little bit over six. But in our forecasts two thousand twenty one, very rapid recovery.

As you say, we've we've never seen these kinds of growth rates. But then afterwards, I think the economy is going to be much closer to full employment by late this year early next year, and so in two thousand, twenty two, twenty three we will see no meaningful deceleration. Think, you know, maybe three instead of eight on a on a que four the Q four basis next year, but with an unemployment rate that's then the low four percent in all forecasts, and employment rates that have mostly recovered

the big slot. Just to build on what Tom is talking about, this idea of faster and hotter boom but a much quicker cycle that Andrew Sheets of Morgan Stanley was talking about earlier on the show. What is the anatomy of an economy like that? Given the fact that markets and frankly economy is often don't move in straight lines, that there can be accelerations and there can be busts, especially with how high asset prices are. I mean, what do you foresee over the next few years as we

get back to this low flation normal. Well, I think we'll see a very frontloaded recovery and then something that's more similar to the growth rates that we had pre pre pandemic, with potential growth in the two percent range, maybe a little bit the law two percent, but that's not really the constraint at the moment because we still have a lot of spare capacity in the in the economy.

There could be future shocks, of course post pandemic. There will be future shocks post pandemic, but I think in the neo darm it's really about making up the lost ground from the from the shock of two thousand and twenty,

and I think we're all positioned for that. So yeah, let's have a clinic approaching this conversation a little bit later today the decision, the Summary of Economic Projections, the news conference as well, youth forecasting above target inflation then above two percent at least in the next three years at some point in this SEP that comes out a little bit later. Yes, we do expect the two thousand twenty three number for core PC to go up a tenth.

Currently as of December showing two point zero. We think that probably goes to two point one percent, could even go to two point two percent, but I'd be very surprised if it's stayed at two. I think they will show something above the medium charm target, and that I think is then also going to be a reason to show one hike by the end of two vols and

then twenty three. Again, I'm focusing on the medium projection here, and of course it's going to be a range of different views that will take some time to you know, figure out exactly what it means. But I think the first in the first instance, markets are going to be focused on the medians. So core p c a at two one two two for three, the median dot comes up one, one hike for three. Then the news conference Jan how do you think the chairman shapes the narrative

coming off the back of those forecasts. I mean, I don't think that the story from from Powell is going to be all that different from you know, what he said a couple of weeks ago in the in the in the Wall Street Journal interview where he basically didn't want to provide calendar guidance for either tapering or rate hikes because the committee has decided to phrase all this and outcome based terms. But he did use quite a lot of calendar like language about tapering. He said patient,

he said sometime. He said that there would be plenty of notice before they would start the taper. So to me, that says tapering in the next couple of quarters very unlikely. Late this year as a possibility, but our best guests would be early two thousand and twenty two. What would you have to see on to change your forecast for longer term inflation at a time when you've got the likes of Ray Dalio coming out and saying the cash is trash and the longer term bonds are going to

be worthless in the face of accelerating inflation. Well, I think there are a number of things to watch. So our baseline scenario is that inflation goes up substantially in the in the short term that's driven by lapping the

big declines of early two thousand and twenty. We got we get to two point three percent for CORPC in April, then it comes back down, and then after that you see sort of a gradual acceleration a little above two percent by two thousand twenty three, and then somewhere in the two and a quarter percent range beyond that, maybe

a little bit above. So relative to that sort of baseline scenario, if you had, you know, a sharp increase in inflation expectations, that would certainly be a warning sign, probably something that would have to be visible in a number of indicators, not just break evens in the bond market or or or or household expectations, but but a

combination of that. You'd certainly be focused on that. If you had a really big overheating of the economy with you know, employment rates that are far beyond the sort of cyclical heights that we've seen in the in the past couple of decades, yeah, I think then you'd be more worried about bigger wage rice spirals. In our forecast, we basically see the sizeable current output gap, the slack in the economy being filled in and maybe beyond normal, but not dramatically. But if that try not be wrong,

then obviously we'd have to do that. You're reading my mind exactly, And this goes back to the hallmark work at Dudley mckelviy you and the rest of the Goldman Sex team. Is there a complete underestimation of the elasticity of supplies coming on You get a boom economy, the animal spirits pick up, the output cap closes up, and that's a good and normal thing, right, Yes, absolutely, that's a good and normal thing. And there can be too much of a good thing, of course, that's that's always

a possibility you have to consider in our forecasts. It doesn't it's not too much of a good thing, it's it is a good thing. But I also think you make a good point about the potential for supply to you know, proved to be a little bit stronger than people have built in. I think that's a good point as well. And so far the supply side information that we've gotten during the pandemic has been I think better than than most people would have expected a year ago

and my months ago. Yeah, we gotta squeeze one more in for Chairman Pound in this news conference for you, how Michael McKee out a question for the chairman what is it right now top of the mind for the team of government. I think asking about the you know, threshold for for for rate hikes in terms of you know where core PC inflation is. I think that is

going to be the biggest questions or people. Of course I've focused on the on the dot plot per se, but but even more so perhaps on where rate hikes are as a function of where the where the inflation numbers are. So, for example, if you had two point zero for core PC and the hike, that would be viewed as very hawk ish. If you had two point two or two point three percent for CORPC and the hike,

that would actually be pretty devilish. And so I think getting into that that relationship, I think it's going to be important. John. What's so important here again is I've got to get the hats look going. I mean, I'm working on it right now. It's the problem. Put it back on a catch up. We want to do it again. Thank you. There's some important stuff there. We decided a number of days ago that our team would go out and get the best voices we can. Yantius will join

us here in a bit. As we move forward to the FED Show two PM this afternoon, we start Strong or Strongest with Glenn Hubbard of Columbia University to say is professor of economics, former consul of Economic Advisors. Chairman, doesn't do credit to what he did at the Columbia Business School. Is his his tenure there is well. He is the most articulate supply side conservative out there. And we start strong with Glenn Hubbard. Diana Hubbard, I am thrilled to have you on the show to talk about

the assumption that growth will save us. Your lawyer, colleague, Joe Stiglets, would say, over time, over the years, we can grow our way out of a five standard deviation deficit. Does that math work Well, it really doesn't. For two reasons. We will grow very rapidly this year six plus percent. That's a challenge for the BED to change its own forecast going forward. With the fiscal impulse reversed, we're back

to more normal rates of growth. Second point, A lot of our problems in fiscal policy are a programs that just grow on autopop so called entitlement programs. Growth alan doesn't save you there. We are going to have to have some kind of fiscal consolidation in spending, in taxes

or dare I say it, inflation. Glen Hoummard, I remember in August Thursday of two thousand seven, where we all looked at four standard deviation three month T bill four standard deviation lieb or we're way out over that, We're out to a medical chart of moving on our fiscal policy. Does its signal crisis that we're out near six standard deviations on deficit to GDP? I don't think it signals

a crisis, but I think it signals a warning. It's not a crisis to the extent this is largely one time borrowing, although even there it needs to be smart, which I can't entirely say for what we what we've just done. Going forward, though, we have to have a more sustainable fiscal policy, and that requires taking a hard look at promises we're making. For example, many promises being made in American Rescue Plan Act aren't paid for going forward.

Ask what are we gonna do about alright now? Recent Washington Post article that you wrote with Alan Blinder, you said there are good reasons for running large deficits now as long as the spending is well targeted. I get the sense that you have some criticisms about what was just passed at one point nine trillion dollar stimulus. What in there is targeted do you think is appropriate? And what do you think is not? Why think a smaller

bill probably would have done the trick. About a trick, I mean making sure we've shored up unemployment insurance, modest aid to states, aid to businesses for continuity. Those sorts of things make sense to me. Writing checks to people who didn't lose their jobs and his wages didn't go down is hardly targeting, and it risks ruining firepower for later. And of course, part of what's in the bill has little to do with the pandemic and is a set

of social policies. And they may be good, they may be bad, but they're not really part of a stimulus, limiting firepower for later. Are you talking about possibly the Fed's hand being forced with higher inflation than expected? Are you talking about it sucking the oxygen out of Washington, d C for infrastructure spending in other initiatives. I'm talking more of the ladder. I don't expect to fit there

will be a transitory burst in inflation. I don't expect the FED to confront and inflation and crisis as a

result of this. I think it's a warning and communication is important, but I do think it puts at risk other physical agenda's President Biden might have, whether it's physical infrastructure, whether it's training initiatives to help workers prepare for a new economy, all of that could be put at risk because of overdoing it here, Glenn, pre pandemic, we lived in a world that was very, very shallow growth, and it was a very extended cycle as well, low trend growth,

low inflation, certainly not the kind of inflation to worry about. Is there anything in this bill that really disrupts the existing trend before the pandemic? Coming out of the pandemic, I don't think so much A built this bill, but I do think we could be on the verge of much better productivity growth going forward, which would presage a better growth rate. The risk in this bill and what follows on, is that a combination of excessive spending in some areas and tax increases to pay for it limit

that growth. I think that's the risk we're going to hear about in the next couple of years. The reason I asked this, Glen, is because the last cycle was so long and so shallowed, and I'm trying to understand as we move three, this one really quickly, particularly in financial markets, and if we see that snap back just as fast, whether we need to be prepared for short psychos again and maybe look past the history of the

last ten years and looked at what came before. Well, I think a law will depend on how policy response has developed. So after the global financial prices crisis, we did have a fairly sluggish and eventually large policy response, but it didn't really reset business people's expectations. Fairly anti business regulatory and tax agenda, And so the question is will we do that again? I hope not, and I don't necessarily think so. I think President Biden has a

somewhat different agenda, but we'll have to see. Glenn Harberg, can we close the inequality that we have? Can we close the pandemic induced inequality given modern technology? This is something you did at the business school. You lead on this for years. We completely understand the technic would not understand the technological impulse right now. Are we asking for too much from our authorities to close the inequality gap? No?

I don't think we are. I don't think we can quote close it, but I think we can start by asking a big question. Given the technological changes, you put In and also globalization have disadvantaged some kinds of workers while they've advantage most of the rest of us. What can we do about that? If I were President Biden thinking about quote, infrastructure, I would think about preparing people, So that would be focusing on community college and focusing

on distress communities in a meaningful way. That to me is preparation to compete. That's what Adam spitballs all right, Glenn, Just to wrap this all together, the underlying fear and markets, the underlying debate is really on inflation. And you touched on this earlier where you said that you do see this more as a transitory phase, or at least that

that's how the feder will look at it. What would you see or what would you have to see to shift your opinion to say this time really is different in terms of a new inflationary regime where suddenly prices start going up at a substantially faster clip for a prolonged period. Well, I think exactly as you said, you need to see working its way through the system that sustained priced increases at all levels and wage pressures to

follow it. But I'm more worried about in the near term is a spill over in the financial fraud in the markets more than goods prices and services prices getting out of hand. Glenn, always great to catch up, so appreciate your time. Thanks for being with us, Glen Hubbard. They're the former Council of Economic Advisors chairman, and of course Columbia University Professor of economics Andrew Sheets joins us.

Now more Can Stanley, chief cross assets strategist. That's not where we'll start, and true, we're going to start with the cycle because you guys have put out a note in the last twenty four hours and I touched on with Mike Wilson, your colleague, yesterday, and I think it's really really important to understand that you are already talking about mid cycle dynamics in this market before this economy is even reopened and gotten started. Yeah. Thanks, Well, good morning,

um everyone. And I think that's a really important theme. Obviously, there are some near term events, key events today that are going on that matter a lot for the market, but we do think it's s important to step back and think about this cycle. And I do think there are a lot of reasons why this cycle could burn hotter, but because of that also burned shorter. And that's a key theme from us at Morgan Stanley. That's what what my colleague Michael Wilson was talking about the other day.

And I think that means that, you know, the market might have to transition from early cycle trades and investment strategies to mid cycle or even late cycle strategies much faster than one would have done in kind of past past market cycles. Andrew, do you agree with me that the heart of the matter to the take it to the House of Gorman is the calculation by Ellen Zetner of when and how the g d P fade occurs. That's really the first order condition here, isn't it? Well?

I I do, and I so think you know, to a point you guys were mentioning earlier. I think there is a lot of unprecedented um elements of this, right. I think you have in some ways a really unique

demand and supply shock happening together. Right. If I think, if you think about that demand curve, you have a record high savings rate, You've had a record amount of physical stimulus put into the economy in the form of checks and other other transfers, and then you have a lot of people who for the first time will be able to consume goods and services that they have not been able to consume before and might be more more willing,

might be less price sensitive to doing that. So, you know, ellen Is Forecasting has an above consensus kind of eight point one percent growth number for for for this year. Um, you know, we we we're very optimistic around the US growth outlook. But but indeed, I think some of the question for the outyears is does that start to come

does that start to come back? And then also I think for companies, you know, a very normal cycle dynamic is that as the cycle progresses, sometimes you get margin pressure. These costs that come through with the economic expansion start to hit the bottom line. And so whereas early in the cycle, things like small caps do very very well because they have very strong operating leverage, they start to do less well as the cycle progresses because of some

of those cost pressures. Andrew, this is a fantastic explanation of how we can see that incredible growth that you're calling for the Goldman Sacks is calling for well, also not seeing long term inflation pick up. When you say burn hotter but burn shorter, there is a question when do treasury is ten ure Treasury has become a buy because of the expectations to this reversion to a slow growth world of perhaps even a downturn on the heels of this very fast and very hot expansion. Yeah, no,

I think that's absolutely the right question. So so at the moment, you know, our our asset allocation is still underweight duration. That being said, are our interest rate strategists, you know are forecasting the US tenure to in the year at at one point seven percent, so we're very close to that number. So I certainly think it's it's the right question to ask. And as the yield curve is steepened, that the carry the economics of holding treasuries is getting a lot better. So you know, I do

think there's important things to watch. Obviously what we get today and what we get out of this question around the SLR exemption as I think important, but also I think stepping back, I mean to me, one of the most fascinating charts is in the entire market is what the break even expectation curve looks like. And at the moment you know that is the FED could not ask

for a better set of break even expectations. Inflation expectations right there, they're high over the next five years, but then they're lower over the next ten years, they're lower over the next thirties. So that is not telling the

story of inflation run out of control. And I think that's important for the bond you know, for the bond buying story, because I think, you know, essential to kind of bonds being a buy for some of those those yield curve dynamics to come into play, is the idea that we're not going to get something to run out of control. I think certainly at the moment, the inflation curve is still forecasting and we've got to go to this. John Ferrell mentioned it earlier. I mean, I look at

the heritage of John Randolphin Brown Ultimate Frisbee. Andrew, did you do a Brown Ultimate when you were there? I did. I'm I'm happy, happy to say I did very good. Andrew Sheets, thank you so much, and thank you all

American Brown Texas was a really important match. Said right now, on this FED day, we get perspective from a former governor of the Fellow Reserve System, Randall Krosner, at the Chicago Booth School, and he has steeped in the history of Chicago, from Night to Stigler onto Milton Friedman and all of the good work of the modern age. Randy,

we have fought a pandemic war. Out of World War Two, we had fourteen percent inflation, and in nineteen forties seven, all of a sudden one percent inflation five six years later in nineteen fifty three, the inflation of Trueman. Can it be the inflation of Powell? Where we get back to normal quicker than we think? Well, I don't think that we are going to be seeing some inflationary pressure.

We certainly see a very very strong, extraordinarily strong fiscal stimulus and and obviously a lot of support from the Fed. Are we gonna see numbers anywhere close to what you just quoted on the highside. I don't think so. But I can see a boost up. Well, we see a boost up in inflation, and there's this god awful fear it's the sixties and seventies inflation of a sustained inflation. What is that likelihood? Well, this is this is the

thing where we u we don't know. Um, We're in the unusual situation where the central bank is trying to push up inflation expectations and shop inflation. In this context of now a potential for a strong boom in the economy with the fiscal stimulus, the question is could inflation expectations become un angry. The FED has been trying to move them up to two. They've been persistently below too for the last decade. But when you start moving them up,

they continue to move up. And that's the uncertainty. So much uncertainty right now. Randy, and I want to touch on your experience in the Federal Reserve as well. Do you think it's the correct approach to take the lessons learned from the previous crisis and apply them to this crisis. Well, um, there are some things that are similar and some things that are different. So I think some of the lessons that the FED learners it's incredibly important to provide liquidity.

So when I was there, we had created all these you know, we did the large scale asset purposes and all the lending programs. FED immediately stood those up about a year ago and it's actually almost the exactly a year ago and provided that to the treasure markets were functioning to make sure that we were avoiding a financial meltdown.

That's extremely important. What's new is that m uh, this the extent of the fiscal stimulus, and that the restriction on on consumption was really policy induced because of all the restrictions associated with the pandemic. When those come off and combined with the fiscal stimulus, this is really something

we haven't seen before. So the reason I raised this around is because, as you know, your former colleagues have been conditioned by the previous cycle to believe they need to run this hotter and I'm just wondering whether you think they'll be surprised by how quickly things snapped back well exactly. That's why this is something that's unusual to have a consumption being pent up because policy choices made people stay home um and because of concerns about infection

with the rollout of the vaccine. With people feeling more profitable out with policy restrictions being relaxed, plus an unprecedented stimulus, you couldn't stand back quite quickly. Professor. There's also a concern that the FEDS policy of holding monetary conditions so easy do threaten financial stability over the near and frankly over the longer term. This idea that asset price inflation is very real and very hot. At what point does this pose a financial stability risk that the FED really

cannot ignore? So I think this is something that that they're thinking about, but is not the main thing that they're focusing on right now. They're they're really focusing on making sure that we do have a firm foundation for recovery. The less thing that the Chairman Paul wants to do is to to sort of spook the markets and have financial conditions tight and dramatically have the markets turned south before we actually see the boom coming. I think they say, well,

if we have a boom, then we'll deal with it. Um. That could be a very good approach, but it could also be one where you're taking a lot of risk for infliction expectations to get out of control. Brey, tell me about the multipliers. I mean, it's not the micro economics of Chicago, but we can go there. Do we have any understanding of the multipliers of consumption and the rest of the equation or is that truly a mystery

at this unique time. I think there's a lot of uncertainty a path when people make very strong assertions about what so called multipliers are that is, when the government spends a dollar, how much does that turned into additional g D p UM. But again, we don't have a lot of experience with this type of UH. This type of condition where poised for potentially very big consumption as

well as production group. Randy, we gotta lead to that, Randy Crowson to that University of Chicago, both School of Business, Professor of Economics. Thank you, sir. We had a historic conversation yesterday with a Mesha Dolgo. He was scathing on the European vaccine response. We go American today with Laurence

Sauer with JOHNS. Hopkins as well, Associate Professor of Emergency Medicine. Lauren, I see a lot of percolation that as we open up society we may quote unquote Plateau and ours statistics. Is that fear valid? I think that fear is valid. I think the key is to open up safely exactly. You know those words are so important, right. We still want to use all of those tools that we've been

developing over the last year in fighting this pandemic. So when we're reopening businesses, can we do it safely with good practices about distancing between UM patrons. Can we continue to use masks? Can we continue to reinforce those face covering requirements even if we're reopening bars, restaurants, other businesses

in society and especially in schools. Yesterday, Mare de Blasio of New York City came out and said, it's really unfortunate that cities aren't receiving vaccines directly from the federal government, that it has to go through the state. Yes, this has to do with the tiff between Andrew Cuomo and Mayor to Blasio, and yet this also does highlight a key question. Should cities be getting the vaccine directly? Should

we be getting a better distribution mechanism from the federal government. Yeah, I think this is a challenge, not just with the vaccine distribution. We saw it with testing. We've seen it with a lot of the other health care activities associated with this pandemic and healthcare more broadly. In the US, we do not have a federal system for healthcare. We

have a disaggregated healthcare system. It makes national strategies for anything really challenging UM and we're seeing that play out in real time, and it will only be exacerbated an emergency, right, because you have to make rapid decisions, you have to rapidly distribute, but you still have to use these existing chains,

these existing pipelines. And so if you want to get vaccine into the hands of the community that has the greatest need and can um it knows how to work with that community to access them, absolutely go through these processes. But um, the way our health care system is set up, there are these sort of chains and pipelines that slow things down. And let's talk about slot of things down right now. The President says, May first, to open up

eligibility to all adults. Here's what Montana has got to say, aprol first high similar story ended a month every other state that watches this happen, and I can how you living here in New York when I looked in Montana at the end of the month and Ohio and start to see eligibility wide open for sixteen plus, I'm gonna be asking the governor here in New York the same thing. Everybody will be asking, why can't we do the same thing. What is going gone? What is stopping places like New

York and others just to do the same thing. Now, open up eligibility yeah, I think there's a couple of challenges, right. So part of it is the access. How do you make sure that you're getting to those most vulnerable communities, And that goes back to what we were just talking about.

Do these states that are that are moving up that timeline, do they know how to access their vulnerable populations quicker or are they just moving on because they have sort of not been able to access those communities and they want to get vaccine. More broadly, these disparate decisions about how we administer vaccine and how we interpret the A C I P guidelines UM are what's leading to these

changing dates depending on where you are. So it also can lead to sort of vaccine shopping, which I think we're seeing a little bit in places, especially in more well to do play is where people have better access because they have multiple residencies, or they meet requirements in one area and not on another, and they can relocate

to access those vaccines. So I think that that may first deadline or timeline is exciting and it's reasonable, and I think we can get there, but we really have to focus on making sure that in communities where access is hard or where we're not getting at those most vulnerable, hard to reach communities and populations, that that's where we target to make sure that we are protecting those who

need that safety net so much more, Lauren. In some ways, these are details, especially when you look at the scene in Europe where they're struggling to get even a relatively a significant proportion of the population vaccinated. Angela Miracles Advisors said today that the biggest economic risk is a third wave of the virus in the United States based on the vaccination schedule, and that may first pledge, is the threat of a third wave off the table. I wouldn't

say it's off the table. I think we are definitely in a better place UM and some would say we're in a much better place than UM we thought we would be. And especially as we started seeing the B one one seven variant enter into the US. UM, we're still seeing increasing cases in that variant. And I think there's a lot of questions about what will happen in the numbers as these rapid reopenings change in places like Texas,

for example. UM, But right now the numbers are still looking good UM and I think the key is to hold on to those measures that we have worked so hard to implement that we know work as we expand vaccination coverage. UM, we're doing a great job I think in in getting the numbers of vaccines vaccinees up UM and now the key is to do those targeted areas that have lower vaccination rates UM to keep those overall numbers across the country down. Lauren always appreciate time. Thanks

for being with us early this morning. Laurence Son that John's help Kins a solid ship Professor of emergency to see. 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