Surveillance: Secular Forces Keeping Inflation Low, Mai Says

over rate hikes in the next couple of years. Peter is that the Deutsche Bank take too absolutely. My My, my colleague Mattelzettie put a very nice report over the weekend um the we we expect the FED to be on hold for the year ahead. We expect a key change mid year. J Palisman telling us expect us to give us give you the result of our year of

policy review here. The major factor in that report will be a strengthening of the symmetric inflation target, recognizing that they've been below two percent for the last decade, that we're gonna be above two percent. We're gonna aim to overshoot a bit on inflation. We're gonna have a makeup strategy. We're gonna have some inflation averaging here. The problem is inflation is not going to be cooperating yet. We see inflation remaining below two percent over the year ahead. Um,

many in the FED do as well. Uh, and certainly that seems to be the consensus. Phillips curve is still very flat. FED has some work to do. We think with the announcement in June, they will, they will bring down the dots right now. They're expecting rate increases in twenty two. Those will come down. They're not going to cut rates this year. They we think they'll be patient.

They'll they'll they'll let the things play out a while, get after they get past the election, get past the politics, etcetera. Early first half of one, we're expecting a fifty basis point rate cut in order to get inflation finally above two percent, just to jump in pizza. Why White, until the month your policy review is complete. Don't you get the sense that even as this monity policy review is ongoing, that it's already become a part of the decision making

process on the f MC. Well, you know, so, why did why did we get a set of dots in the December meeting that had rate increases in twenty two. So it's not there yet. Okay, Pal has said very clearly we'll give you the results middle of next year.

We're not there yet. We're still assessing. So, yes, it may be working its way in and you are hearing people you are here increasingly various FED members say I wouldn't be surprised as the inflation go above two percent, you know, So you're you're hearing it, but it's not there yet in the policy setting. I don't I don't think they want to cut rates this year. Eight years, nine years ago, Dr Hooper Olivia Olivier Blanchard's leadership at the i m F. This is March of two thousand

and eleven conference. Uh, there's a conference on jump starting inflation. I'm looking for the title of it right now. You were probably at the conference. I wish i'd been there, A conference on macro and growth policies in the wake of the crisis. We're still talking now what Olivia Blanchard was leading on in two thousand eleven. Is there any evidence institutions can jump start reflation? You know? Uh, the Phillips curve is not totally dead. We did a lot

of research earlier this year. Come on, you got the embalming. Is the cremation or are we going to go with a full beak? It's it's dead at the national level because the FETE is basically killed it The FETE has over The FETE has been over emphasizing any time we get toward a tight labor market, it doesn't allow us to go there. Prior to nineteen eighty, the average unemployment rate was was well below NEHRU. The average the labor

market was tight. Since nineteen eighty ridge unemployment rate, it's been a close to one. It's been a loose, loose labor market situation. I think we need to get the unemployer rates significantly below the natural rate. And the natural rate the NEHRU has been climbing down. It's it's four percent or less. Now we need to get into something. We need to get into a two handle of unemployment

before we're going to see inflation. Do we have a negative unemployment rate, Well, this is a negative negative unemployer. I think that this academic discussion of is inflation dead has a very real underpinning of the existential crisis right now markets and guess I use the word existential this morning. Uh. And this is that is this sort of low inflation rate, the low growth rate, fundamentally inconsistent with the risk price asset. That the sort of risk rally that we have seen

over the past few years. How much further can it go on the heels of low inflation, low rates if there is something fundamentally broken with the inflation and the wage growth kind of bleed through, well, that is the one risk in this in this this picture and a very interesting uh talk that Eric Rosen grand Bossom PET president gave in New York yesterday where he said, look, this this is a risk we need we need to do some counter some uh, we need to control things

a little bit. Let's raise uh the countercyclically capital buffers of the banking system. Okay, there are some things we could be doing to reduce some of this risk, this financial risk. Yes, evaluations are looking a little high. Yes, corporate credit growth has been a little lofty. We're nowhere near the level of financial risk we had in the late nineties, for example, that we're not there. I think we can push push further to get the unemployee right

down further to begin to get inflation up. But we have to be a little bit of cost, a little bit cautious with what's happening on the financial side. No question paid a funnal question for you, just to tap in some of the research. I know you in the team have been working on a lot of people looking at the data worldwide in Q fourto Q one twenty, looking for stabilization in the global economy. I don't know if the recovery is you shaped. I have no idea

if it's l shaped. I'm trying to work out whether, to your point, is it green shoots or a false dawn? Which one is it? That was record cliche. You eight cliches in there. It's the front page of them. He's trying to trying to banks special growth green shoots, So false dawn, false dawn. Let's let's think green shoots. Okay, maybe there's a little bit of false dawn still in Europe, there's some question marks there. But we think China is going to be looking a little stronger than people expecting.

There's a there is there is a consumer cycle in China. I mean, as we go from four D to five D, there're gonna be a lot more purchases of cell phones coming up. They're also in the middle of an auto cycle, so we're sinking China's gross above six percent next year, um all at six percent, least US is looking better to certainly certainly fed. Being in in accommodative territory is helpful and with on the whole, on the whole, the risk situation improving a bit on balance. Remember v shaped bottom.

You can have apologized to from Matlozetti. I mean we've we've staggered since August of two thousand and seven, from cliche to cliche to cliche, and we're just I think you nailed it, frankly with this whole thing of Candy's institutions. Reflect it's a huge Yeah, I'll give you distract and thank you Pa, Thank you Bank Security Static head of economic research John bringing the col of my And this is on the Pimco view which I think a lot

of our listeners viscerally feel a more conservative. You going into Nicola might joining us now. Pimco portfolio manager, suffering credit analyst, Nicola, what me through what you see global growth, global inflation, US growth, US inflation, the kind of numbers you're looking for sure. Um, well, I would say that, you know, concerns about recession in twenty have definitely been temperate because of a few positive developments. I mean, we have a trade deal between the U S and China.

It's a limited one, but still you know, not for further escalation for now in terms of the trade war. We have monetary policy in the U S which is getting some traction, especially in the housing market. Worksit risks have been reduced, and you know, there are some tentative signs of spottoming out in the manufacturing sector. So what we expect essentially is a gradual reacceleration and growth um

the global economy the skirts the recession. I mean, the only thing I would say is that, you know, even though recession risks are lower, monetary policy is basically out of bullets. So if we do end up having a recession at some point, the loss given recession could actually be higher. Nicola a lot of people because on the

Federal Reserve and the ECB. Here at Bloomberg Surveillance, we're focus on Sweden's rix ricks Bank, which is going to be potentially raising rates out of negative territory tomorrow and they're doing it as a quote philosophical rate cut rate hike, as one person said, because they just don't think that negative yields are working. How closely are you watching that? Well, we think the one is interesting. I mean, we've we've

been writing about this. We think that negative interest rates have been kind of working so far in terms of like bank bank lending rates falling in terms of credit growth act actually accelerating at the margin. But there is some significant damage that is being inflicted by the negative rates on bank balance sheets, pension fund balance sheets, insurance companies balance sheets. So we don't think negative rates have much further to run, and actually the longer they persist,

the more damaging they might become. So in this context, I think the Ricks bank is one of those institutions that is becoming, you know, particularly worried about it. So I think the rate hike should be seen in that context. Yeah, And a lot of investors are eerily watching this, and certainly banks are excited about this because negative rates has

certainly hurt their bottom line. How closely is the e c B watching though, I mean in order to figure out what their exit strategy could potentially be, So I I think if you look at the ECB rhetoric, I think it's it's become more conscious of the fact of the side effects of the negative interest rates. I mean, if you think about the tearing, the introduction of tearing, it's you know, it's a reflection of that as well.

I think in terms of actually getting out of negative rate policy, I think it's gonna be really hard for the ECB for now because if the c B were to start to high rate in back to zero, I think the implications in terms of the currency could be significant, and in turn that would have impl issues for inflation and growth. So at the moment, I think there will

be steady at this level. If they have to do more easing, our sences that they will focus more on quantitative easing, liquidity operations and forward guidance rather than bringing the rates further into negative territory. Nicola, the ECB has lost a lot of experience in the last twelve months, lost the chief economist Peter Pray, lost the e CP president Manua drag and it's about to lose ben Wa

Kure of the e CP Executive Board as well. He had a fairwell speech in the last twenty four hours, and the following quote is something that he delivered and everyone's jumping on. It was time to dismantle the absurd idea of an omnipposent central bank that can mechanically steer inflation. Do you think those thoughts will be a part of the monetary policy the strategic review that the CP and Christine Legand is undertaking. Yeah, I mean, it's it's gonna

definitely gonna be an interesting review. Um. I think monetary uh, you know, I think the ECB and several money street policy makers are realizing that it's actually very hard to lift inflation because of secular forces like globalization and technology keeping inflation low. Um. But you know, if I were to guess, I think the review, you know, what they might do is actually change the target a little bit from below but close to percent, to something a bit

more symmetric, maybe just call it two. I think if they were to actually give up on the inflation amandin or on the supercent that that would, you know, would be quite damaging potentially, especially given how high that levels are. So if you give up on inflation, you're you're probably going to create quite a bit of trouble. Bank of American Marylynch did a recent credit survey of investors in Europe and one theme was the sort of Barbel approach that people seem to be taking, or they go into

highlight one bonds but then also going on cash. And one of the big fears has been that inflation risks are under a appreciated in markets. Do you feel like that consensus view heading into next year is accurate and and coheres with where PIMCO is at To be honest, I'm not too worried about inflation. As I mentioned. I think, you know, like there are these secular forces that are

keeping inflation low. Phillips curves continues to look pretty flat, and in the current kind of early weak course environment, I don't really see corporate pricing becoming aggressive, and you know, I don't see significant increases in inflation. I mean, over the long run, there could be forces that lead inflation higher, including protectionism, UM and UH and that that could limit supply and and eventually raise inflation. But I think these

are longer term phenomena. NICOLEA, Thank you so much. Nicole. Am I with us with pim coke seriously economic data, big time economic data. The next two days Thomas for Sally with US now with RBC Capital Markets time, have you marked down Q one because of the Boeing effect? No, we haven't yet. Um. I mean we obviously are as most others are fully aware that there is some potential hit there. Um. But you know, whatever the hit is going to be, I you know, it's just it's so

ridiculously academic. I mean whatever what you know, whatever they take, they're going to give back. Um, So you know, whatever it is worth. I think people have to recognize, you know, just just to use a you know, fed lingo it it's gonna be a transitory effect. Is our is, our audience are public. They have to get used to sub two percent GDP or near two percent GDP. That's unacceptable, it's un American. Well, but the reality is, but that's

that's what we've been doing, right. Uh. You know, there's there there's no escaping from from that reality. I mean, it almost doesn't matter how you want to look at it. But you know, on a year of a year basis, I mean we've been sort of you know, hugging you know, over slightly over slightly under the two percent line for

what the better part of the entire cycle. Um. I mean, there's obviously been periods where we've sort of, you know, gotten close to four percent, But then there has also been periods over the course of the cycle, you know, where we've gotten close to one and a half percent. But you know that again, we're hugging the two percent line. And that's been true for the vast majority of this expansion.

And Tom, a lot of people would say that's just fine as long as nothing goes wrong, and I guess the margin of error gets a lot narrower when you get closer to that stall speed. I'm just wondering, how close are we to a place that is unsustainable for an economic expansion? How far away? Yeah, at least I think it's it's it's it's a great question. And I think the way that you need to think of it is, you know, sort of, what is the wherewithal for the

consumer to continue to propel economic activity? And the reality is the U s consumers And I mean, you know, I hate to use, you know, sort of very fluffy words, but you know they are in utterly fantastic shape. I mean, it almost doesn't matter how you want to look at it. Um, you know, whether it's the level of savings, whether it's

you know, sort of their their debt service ratios. I mean, by almost any measure, the consumer has the ability to continue to propel consumption to around this this you know, sort of two percent page. So, you know, this idea of recession is funny. We're in the midst of writing our year ahead. Uh and and and the one thing that we said about the year that was was that, you know, despite the fact that it was actually a

pretty good year, people were overwhelmed by negativity. Right. It was like everyone kept on saying, the recession is here, their sessions here. Yet here we are at much of the conversation, we're having a moment ago chugging along at a at a two percent page. So you know, I think what people have to do is they have to keep their eye on this. You know, a really important idea, and that is labor backdrop is really tight. Wage pressures

are probably going to continue. The consumer as a result, will be able to um really support a two percent profile from a growth perspective in the coming year. I just think it's great that obviously White until the end of the years put out the year ahead. You know how some people write this thing in October going into November.

I'm very happy to do that. Tome just quickly, your assessment of the labor market, with confusing so many different terms, full employment, a cyclical, bacon labor market conditions than the Federal Reserve chairman talking about slack, what's your assessment of the American labor market. The labor market is tight. I mean there that is. That is an inexcapable truth. Um. I mean there's countless ways of driving that point home.

You know. One of the ways that I think you can do is look at the number of people that are not in the labor force. This economy has done a phenomenal job of pulling people that we're not in the labor force back into the labor force. I mean we are now back down to um sort of previous cycle levels from a not in the labor force perspective. In fact, we would say that we've probably pulled all the people we can um from from the backdrop. And Jonathan,

you've set me up nicely. Just to make with this one really important point, I think people have to get comfortable with this idea that job growth is going to slow down. Now again, you're hearing this from someone who actually has a pretty constructive view in the backdrop. But the reality is, we've pulled so many people from the sidelines. There's there's there's only so many additional people we can pull. Break even from a job growth perspective is about a

hundred thousand jobs. So even if you slow down to a hundred jobs on average per month, which is what we expect, you're still above break even. Um, that's still enough to keep the unemployment rate at a minimum steady and even push pushed down the unemployment rate to some extent. So I think we have to reorientate our thinking. We got to re orient ourselves to a discussion on wage growth with you down the road, Tom PERCELLI, thank you so much. With RBC Markets, Paul. We look over at

our screens here. We got like forty two TV screens in the studio to keep us on and we're beginning like six hours, which you know is going to be seven or eight, right, I mean, it's just gonna go of this really historic moment. Whatever your policy, let's trying to get the politics out of it right now and just talk about the the tenor of the day. We can do that with Emily Wilkins joining us now from Bloomberg News in Washington. Emily, I speak of the tenor

of the day. Is there is it like excitement over this? Is there a sadness over this? What's the actual mood on Capitol Hill? Speaker Nancy Pelosi has said throughout this process that this is a somber move. She has, you know, tried to do this without you know, excitement, without a sense of you know, she's not trying to portray this as some sort of victory for Democrats to do this. She's tried to keep it somber and solemn throughout. Prayerful

is a word that she's used a lot. But right now, I mean, everyone's just sort of gearing up, as you said, for what is expected to be a very long day. At this point, we're not expecting to see votes on engachment until around seven thirty this evening, So Emily, give us a sense of what actually is going to happen

today in the House of Representatives. So the House of Representatives are going to spend about the next six hours debating the rules for the articles of impeachment, and through that we're going to expect to see Republicans try to do certain things to delay this process. We've already seen this morning them call for a vote on a motion

to adjourn and everyone leave. Um. Of course, because Republicans do not have the majority, none of these attempts are expected to actually proceed, but they could slow things down a little bit. But because the rule is structured, there isn't a lot of little room and so we definitely expect to see votes this seavening so emily. Will there be any kind of witnesses today? We was just just representatives going back and forth against each other, kind of

pleading their side. This is just this is just the representatives. This is to give lawmakers a time to come to the floor to speak to make their case. We're going to be seen perhaps witnesses over in the Senate. But the rules for how the Senate debate is going to go are still under discussion. That's going to be in in January, and that's something that people are looking to uh Majority Leader Mitch McConnell and Minority Leader Chuck Schumer to see how they wind up working that out. What

are you looking for after this vote? I mean to be clear here, there's a vote tonight we're done right in the House. Okay, then what happens next? What exactly happens next? So what happens next is that the House is going to take the articles of impeachment and bring them over to the Senate. And what they did? They do that on a silver platter. I mean, how do

you actually do this? Does anyone you tweeted over? I think you actually have someone physically walk over between um, walk over between the chambers and actually go ahead and announced to the Senate these articles of impeachment. I know that's the way they've done it for previous bolts. Interesting and then, Emily, so give us a sense of what let me get to the Senate that is actually going to be a trial. So I'll go back to my

previous question. Will I know there's a discussion point between Senator Schumer and McConnell about whether there will be witnesses called. How how do you think that's going to play out? I mean, right now, Republicans do have the majority over there, so they do have something of an edge, but things need to be done consent. Uh. Schumer has certainly asked

for witnesses to come. The White House has wanted to witnesses to come they've wanted to present their case, but there's also been discussion in Bloomberg's reported that there's some hope that this will be a pretty short process, that they can have the individuals from the House and present the case, will have Democrats present the case, who have Republicans present the case, and that they can move pretty

quickly after that. Thank you so much, Emi will Coin's greatly appreciate what it will be certainly a long day for heard on all of our Bloomberg News team in Washington. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio