Surveillance Special: The Fed Decides, Jan. 31, 2018

Janet Yellen signs off. The FED chair may strike a more hawkish note with an upbeat appraisal of the economy in her swan song, and the Powell era arrives. The leadership transition at the world's most powerful central bank comes just in time for a fresh approach. How will Ellen successor tackle the inflation puzzle? Plus March move fund managers

placing their bets on the fence next policy action. We'll speak with Bill gross Up, Janice Henderson, and my co host Today and every Fed Day is Tom Keen of Bloomberg Surveillance. We convinced him to Stanley and hang out with us. Tom. Thank you, Yeah, data check good to be here on an important day and historic day right now, to get some thoughts before we see this. I guess nondecision.

Michael McKee with this Bloomer's International Economics and poly correspondent in Montreal the last couple of days on the NAFTA UH discussions, and I am Jersey with us, our chief US rate strategist for Bloomberg Intelligence. Michael McKee with the sartorials blended this morning. Yeah, that picture that we ran at the top of the show, Jenny Ellen. I don't think you can pull that up again. Jenny Ellen? Where's

her collars? Pop? Today's her last meeting and there is a tribute going on at the FED where everybody's walking around with their pop collars. So I I would join in like everyone else, and we can we can salute Janet yelling as she every funnel there her collars popped. So there's a there's a thing going on popular collar today. It's Janet Hillen's last meeting. We gotta post you on social media so you can join the party. Are our jersey? No popped collar for you? I don't know. I just

don't think I can pull it off. Like Mike Ken well, it's gonna be her last day. She's not gonna make an appearance. She's not going to give any kind of speech, right, and we don't see her. It's very quiet, right they have by now, they have finished their meeting and they've sent over the press release that they will give to the reporters. They've already given it to them, and we'll get the data in about two minutes and they'll tell us what happened. But it's done for her now and

it is going to be J pals fit. Why aren't they raising rates? So many people are saying, we have to wait till March. Why do we have to wait till March on? Well, you start with the fact it's a non news conference, meaning but also there are no inflationary pressures. They're not pushing up right now on us. We're seeing break evens move a little bit, which is your reason to think we're going into March, we'll have

more data. They could do that. She also doesn't want to bind J. Powell in the future with a decision today, so they'll leave it up to him. They'll leave their options open, say as little as possible. Is there a potential for a surprise here, I don't think so. I agree with Mike, but I also think that one of the reasons Tom that they're not going to hike today is because they hiked in December and they want to go slow. They want to go measured in order to do that at the pace that they want to go

with three hikes this year. If they hike in January, that means that if there is a blip in the data, if there is some exogenous event, they can't take that back in March. And part of this is the idea of measured. We have Chairman Greenspan coming up later. A great honor to have them with us this last day for chure yelling, this last meeting for chair Yelling, might

define for our audience what measured actually means. Well. He was the one who said, basically, what you want to do is raise rates slowly and keep inflation as flat as possible, not below two percent, but you don't want a lot of volatility. And that is the legacy of the green Span years. Some say it led to the Great Financial Crisis because it was two predictable rates were too low for too long, and now they're questioning the level.

So under J. Powell We're probably gonna have a rethink of the way thing the FED does its monetary policy business, But not until two thousand nineteen will that rethink include a different way of looking at market behavior and market pricing action. Well, so, J Powell, we we don't know exactly how he's going to run this FED, and that'll be interesting to hear his first press conference and his

first couple of meetings. This share is going to be important for how the markets take him and should they take him at face value or should they we read more into exactly what he's saying. All right, I Jersey mentioned the markets there, So let's get you a market check right now. The Dow recovering after a two day slide, actually the biggest to day spot since September of twenty six, before Donald Trump was elected. Let's also take a look

at the tenure yield. You could see there, Uh, the bond prices are moving higher or I should say lower, and therefore the yields are moving higher. The yield broke above two point seven percent on Monday the next because three, let's go down to Chris Condon at the Federal Reserve with the announcement from the Fed on Jenny Ellen's last day Chris no rate change from the Federal Reserve, no

surprise there. The Federal Open Market Committee unanimously voted to leave the target range for the Fed funds rate unchanged at one and a quarter percent to one and a half percent. There were some subtle but important changes in the Fed statement compared to December, where they twice referred to expectations for a gradual adjustment of policy and to gradually increases in the Federal funds rate. This time they added some emphasis referring to further gradual adjustments and further

gradual increases. That doesn't seem really to change the meaning of those sentences, but does serve to attract attention and perhaps emphasizes their expectations for further rate increases this year. UH. At the same time, however, there was no change to the so called balance of risk statements, that is, the risk for their economic outlook was again described as roughly balanced. Their language and describing economic condition was also slightly upgraded.

Things like household spending and business fixed investment were described as solid this time around, So none of these really dramatic in on themselves, but a several subtle but important upgrades, perhaps a slightly more hawkish tone from this statement compared to December Scarlett. All right, bloombergs Chris content at the Federal Reserve, Thank you very much. Michael McKee and Iro Jersey still with us. Michael, you heard Chris talk about a subtle upgrade, uh in the FEDS report. In the

FEDS statement, what struck out at you? Well? Two things. One they talk about inflation market based measures of inflation compensation have increased in recent months, a nod to the break evens going up, and that sort of supports the idea of this word further inserted into it. I don't think there's any question that the FED is gonna be raising rates this year. It's only a matter of how many times, So it may not be that dramatic a change.

But it does say that Jpal FED is going to be raising rates and he had to have signed off on it. What we do here at Bloomberg when we have a FED day, and particularly one that is historic, is this is go to Ira Jersey for proper rate translation. Market based inflation compensation gauges rose. Recent in recent months was that Cherry Yellin's recent shopping trip to the grocery store.

What are we talking about in market based inflation? Compensation gauges translate, so so what that means is what Michael just talking about. You're talking about tips break evens moving higher. So when they talk about market based, one of their favorite measures is the five year five year forward tips break evens and those have gone up about forty basis points since the last meeting, which is is a lot and actually contributes to almost all of the move in

uh an interst rate market. So when you look at what's happened to ten year treasury is how they've broken to sixty five and now at two seventy one. That's mostly been driven by higher inflation expectations, not necessarily real rate, so not kind of this risk premium being built into the market. Now Mike McKie has the step Offston because he has an important interview to conduct. I wanted to ask you, is there anything that can derail a March

rate hike from Jerome pell Uh? Probably not. I mean, there could be, of course, a very surprising drop in inflation, but we're expecting Friday to see the unemployment rate unchanged or a little lower. We're expecting if you look at a DP gains of about two hundred thousand or more in terms of jobs, and that's a sign of the FED. They don't believe the Phillips curve is dead, that we are going to see wage inflation. They'll look past the idea of all these bonuses being given out by companies

because those are one time things. But we are seeing in wage inflation moving up. It was in the employment cost index today. We're seeing commodity prices rise higher, labor market slack. Commodity prices higher, you should get inflation. So the market is going to focus on that idea going forward that the feed is going to react to that. Michael McKie, thank you so much. If you go to an important interview and discussion right now on this FET day.

He's our international economics and policy correspondent. Mr Jersey will stay with us to translate various items fixed income. But right now we bring in someone with a real handle on the American economy and of course always with a different view from Chicago. Diane Swank is chief economist at Grant Sworton. Diane, what is the state of the American economy? Martin Feldstein to say? He said, said he doesn't think we can get to a three percent run rate. Where

exactly is the American economy right now? Well, we are seeing an acceleration in growth, and that's good, and I think what Marty's trying to emphasize is to get to a sustained over ten years, you need to see a major upward movement and productivity growth and another upward movement that's also commensurate in labor force growth, and right now we don't have either of those. And so that's what the sustained issue is. You can get for while close

to three percent. I think we'll probably get there this year, but the question is at what price? And does it borrow from growth down the road? Is the Fed behind?

I don't think they're behind. I think the real challenge going forward is the Federal Reserve is tightening in two ways or easying up on the um monetary policy tightening into in two ways, and that is one through rate hikes, getting that normalizing that process, but also they're shrinking their balance sheet and that's you know, going to get more and more complicated because it's sort of on automatic pilot. But every quarter they're going to be allowing more and

more of their balance sheet to roll off. That means less support for long term rates from the Federal Reserve throughout the entire year at the same time that they're raising short term rates. And that's something that markets so far have not reacted to at all. But as the FED steps that up, we could see some reaction to the interesting So it could get more complicated if the market does react. Believe that the FED could then change its approach to how it reduces its balance sheet. It

certainly could. I mean, one of the things that Martin good Friend is Marvin good Friend is very known for his thoughts on the Fed's balance sheet how he thinks it is, and a lot of people within the FED system are looking forward to what he brings the table on his expertise on the balance sheet. They will be

looking at that very closely. And even though it's on automatic pilot, the arkets can give it as automatic pilot, it is complicated because it's at the same time that deficits are going to be rising and Treasury is gonna have to issue more debt. Right Jersey, what's the inflation NESTA representation on the FED now now? And for the

Power Fed as well. Yeah, Well, there's show some presidents in particular, who I think are worried that there's going to be inflation in the future because of the size of the Fed's balance sheet. But now that they're um they're starting to reduce it. I think that some of those fears and some of those inflation east to kind of arguments have to go away a little bit. One thing that that Diane mentioned was that you know, there's

a FED balance sheet expert. I'm not sure any of us really can claim, like anyone in the world can claim to be an expert on this, because no one's trying to unwind a balance sheet of the size so um so. So I think that that's a risk, especially to change from what they've already said the Diana. I like what David Rubinstein said up my panel and Davos he called it the Science Fair experiment. I guess that maybe gets to the closest as we can and watch as I found out myself, yes it was. Yes, we

all remember our disastrous Science Fair experiments. Diane, I want to go to the heritage of Janet Yell and let us go back to our important Economic Club of New York speech. Here a good number of years ago. Let's try it. I can't believe his four years coming up April as well. We anticipate that his labor market slack diminishes, it will is less of a drag on inflation. However, during the recovery, and we certainly saw that folks with cherry yelling, very high levels of slack of seemingly not

generated strong downward pressure on inflation. We must therefore watch carefully to see whether diminishing slack. I think that's what we're in right now is helping return inflation to our objective dayan swack. This really go four years ago remarkably pressing um idea from chair yelling, and we really don't know anymore the linkage of inflation into this. Do you have a confidence in where inflation is right now versus an almost fully employed America? There's we know where the

unemployment rate is. It's it's not the same unemployment rate, even though it's at a seventeen or low as what it was seventeen years ago. And it's really not where it was during the boom of the nineties. And I think that things have changed. During the boom of the nineties, we had falling computer prices that we're helping us to keep inflation in check and productivity growth. But there was this sense. There was a famous FED Beige book March

two thousand that highlighted um now hiring pulse required. We're clearly not at that stage right now, and so we're not getting the wage pressures, we don't have the productivity growth to back them up. We're going to see an acceleration of wages, some of it um just from the minimum wages alone that are coming through in January. That'll add two tenths year every year, two leisure and hospitality wages, which will help edge up the read on the employment

figures on wages on Friday. But the real issue is when are we really going to see firms really stopped treating people like commodities and treat them were like a diamond in the rough and they have to polish them up and invest in them and really push a little bit to get them to sparkle and have an enduring um impact on their human capital. Was you and Tom mentioned? Jenny Allen broke new ground and conceding that inflation is a mystery here. She also broke new ground as just

being the first US female central banker. Talk a little bit Diane about her biggest achievements and also her biggest missteps. Well, I think one of her biggest achievements is this is someone who started in the FED during stagflation in the nineteen seventies, then was there during the boom with Chair green Span in the nine nineties. Then you know, was a FED president, then came back as vice chair, gave up money to do that, um went through the crisis.

In all those shifts in the foundation of the economy, she kept her footing. She didn't was not an ideal log. She actually was able to rethink and say, you know what, the old rules may not apply the way we once thought. And she didn't get caught in that sort of group think of you know, hey, we're increasing the money supplice, so we're gonna have a flair and inflation. Said let's figure this out. And so I think that's our greatest strength. You know, we've seen her, she's been on a learning

curve over time. Do I think that she could have pushed Congress more in terms of relations with Congress. I wish she had had even stronger relations with Congress. I think she did the best she could given the circumstances she was in that said, you know the best we kind, we can always do better. And that's where I really think the FED is under a lot of pressure. Dani's walk with us in Chicago with Grant Thorte, and we're thrilled to have Ira Jersey with us today. Of course

with Bloomberg. Right now we go to the thirteenth chairman of the Federal Reserve System. March six is a special day. He will play tennis on March six, no doubt, in celebration of a birthday. Alan Greenspan, honor that you would join us here. Chairman Greenspan. When you look at the tenure of Janet Yellen, what sticks out to you? What is the most important historical note of the years of Janet yelling at the Fed? Well, Tom, let me suggest

something which you probably are not aware of. It's been a fairly well adhered to a notion on the part of Federal Reserve chairman when they retire, they don't have comments to be made on their predecessors. Paul Voker, for eighteen and a half years never once commented pro con on the monetary policy I was involved with, and I think it's a very important notion. It's a very important issue, and I'd like to adhere to it. Well. I am

glad that you're adhering to it. I thought maybe on this day of our final meeting we could get a comment, but we will await that down the road. Sherman Greenspan. One of the things that we're talking about, and I spoke to Martin Feldstein about, is our expanding debt and our expanding deficit. It gives pause that we will go to one trillion dollars in deficit here in the near future.

What are those debts and deficits mean to Alan Greenspan? Uh, they mean what it's meaning to everybody else, namely that we're dealing with a fistly unstable long term outlook in which inflation will take hold. In fact, I was very much surprised that in the State of the Union message, Yes, they all those new initiatives who are not funded. And I think we're getting to the point now where the

breakout is going to be on the inflation upside. The only question is when we've been through almost a decade now of stagnation and we're working our way towards stagflation, which, as you know, is a combination of both of those. That's a very difficult type of monetary policy to be in. But I think what we're seeing eventually here is an

issue where we've got to confront the deficit. In fact, I've been arguing for quite a long period of time that entitlements are eating into gross domestic savings, and they've been doing that consistently dollar for dollar since nineteen. You knock down gross domestic savings and inevitably domestic debt. Uh, basically every type of debt tends to rise, and we have to get out of this loop. We aren't a

bit of a vicious circle here, Sherman Greenspan. You mentioned a fiscally unstabled long term outlook in which inflation will take hold. We are looking a weaker dollar. It's been weakening for a while now, and the administration has talked up the benefits of a further weakening dollar helping our exports. To what extent will that contribute to inflation? At what point does that start to carry over and we see that that subsequent price rise sooner rather than later, very

well said sooner rather than later. Is there a risk of a weaker US dollar that we are not seeing just yet. I mean, as we await for inflation, what are the risks that it's creating in the financial system right now we look just remember that the UH with the size of the international system UH, the value of the dollar of easily all other currencies is a critical issue in the domestic price outlook in the United States.

And I suspect that if we get a continued drop in the dollar, which has not been going on for a while, that's going to have some additional effect on the price level, the domestic price level, and that's beginning to rise for a lot of reasons which you've just recently mentioned, namely that UH productivity has been dead in the water for the last UH ten years. Almost productivity growth has been a half a percent per year when

it used to be over two. That is a huge difference, and that means unit labor costs are not going to start to move up. And with profit margins rising, that tells you the price level. Charman Greenspan, I know you do not want to speak about president and even future FED chairman. I don't want you to pontificate on what your own powells to do list is, But you can talk about the underlying theories of the pH d s at the Echoes Building. Does Ellen Greenspan still believe in

the Phillips curve? I never did well within that. And then with the with the with the same hood of the Phillips curve right now, or at least it being is honored as it is, which model should we use is we move into the rest of this decade. Well, let me just say this, there was a big dispute in the nineties about the Phillips curve. The Phillips curve

was supposed to basically engender inflation as the unemployment rate fell. Well, the unemployment rate kept falling, but productivity was accelerating at the time, so a unit labor costs didn't move and we had a period where the Phillips curve just did not work. The Phillips curve presupposes a certain fixed rate in productivity growth, and that is not the way the

world works. Yeah, we're missing that right now. Now, speaking of the Alan, you famously used the term a rational exuberance to describe the bullish sentiment that was driving of stocks during the dot com bubble. I believe you use the term in a speech do you see any signs of a rational exuberance in asset prices. Well, let me put it to you this way. I think there are two bubbles. We have a stock market bubble and we

have a bond market bubble. I think in the end of the day, the bond market bubble will eventually be the critical issue. But for the short term it's not too bad. But we're working, obviously towards a major increase UH in long term interest rates, and that has a very important impact, as you know, on the whole structure of the economy. So we're in the bond market bubble. You don't believe in the proclamations that a bearer market has begun in bonds. So this move towards three we're

not there yet. Obviously, if we do get there, it can't sustate itself. What's behind that? What's behind the bubble? Well, the fact sense way, that we're beginning to run an ever larger government deficit. Remember that we're talking now about

deficits going to a trision dollars. But debt has been rising very significantly, and we are, in fact, if one of the technical the Congressional the Congressional Budget Office figures at face value, We're gonna run through the peaks of where we were during World War Two on the ratio of federal debt to GDP, which was extraordinarily high. And I think we're just not paying enough attention to that. Sherman greens Fan. You've worked with members of the Democratic Party,

the Republican Party as well, any number of administrations. You've advised any and all in Washington. What's different about the Republican Party today is the majority party from the times of your service. Where did the frugality go? Where did the prudence go? Good question? If you find it, let me know. Well, you know, there's an acclaimed photo Chairman greens Fan of you laying down in the office of I think Vice President for you were laying down on

the job in the Oval Office. If you were to lay down in the Oval office today with President Trump, what would be your advice to the president? Uh, join me on the floor, Mr President, and then what would you talk about? I mean, I'm serious. Well, then they then the conversation would become classified. So then I'll go and do that. It will become I'll go with a classified combination. One of the mysteries sir, And what we saw in Dabo certainly is the mystery of modern technology.

You are the archkeeper of data, whether it's railroads or airplanes or whatever. Do we have a grasp of how technology influences our economic growth? Well already much for having a whole series of them. I mean, remember that when you disaggregate output per hour, which is the critical long term determinant of standards of living, there are many ways to come out it. And we now have a very large body of data which enables us to see where

productivity is going. I mean, for example, to slow down in productivity over the last decade is very clearly the result of entitlements, entitlements crowding out gross domestic savings dollar for dollar. And when gross domestic savings declines and we can't borrow from abroad anymore, remember we have an eight trillion dollar debt to overseas. So the combination of domestic gross domestic savings declining as a present of g d p UH and entitlements rising UH is the is inevitable

result that was we've seen in news. It's going to be a fiscal challenge, to be sure, Alan green Fan, I want to end with the Jerome Powell changing up the guard when he takes over as the FED chairman. What will be number one on his to do list? What does he need to do first? Open this mail? Now you're supposed to say, Chairman Greenspan, figure out how to use this Bloomberg terminal. That's what we would like you to say, Alan green Fan, thank you so much,

greatly appreciate your time. If we look forward to your birthday in early March as well. Diane Swank hanging on every word at Grant Thornton. I mean an interesting conversation, uh, Diane with Chairman Greenspan. And I think we go back to what you see in the Midwest, which is it's a different America than the time of Chairman Greenspan. The

technology overlaid today is extraordinary. How do you interpret a Grand Thornton tick by tick, day by day technology into this American economy already have no clue or productivity is and you really have no clue where GDP is. Well,

it really is complicated, there's no question about it. And it's making it harder and harder for the statistical agencies to believe it or not to stay ahead of these measurements because they have to get funded to be able to get the improvements they need to measure with big data. They've been doing a lot of experimentation with it. There are some improvements out there. But I think Chair Greenspan really made a couple of really good points about one

the concern about debt and deficits. This is something he's always been a deficit hawk, he was on the Security Commission, and I think he brings up some very important points on that. And before I go into the technology piece, I want to point out it's the evidence on what happens to interest rates is not just the deficits and

not just the level of debt. It's the trajectory of debt, which he's laying out a very dire scenario in and which we do have a very dire scenario on, and its subjectory of debt when it goes up, countries eventually pay. We've got an extraordinary path so far, but eventually you can not escape the fact that bills have to be paid and the rest of the world is watching and the rest of the world is also dealing with debt

as well. So this is something that will be an issue, and I think he made some very good points on that. The other side about technology is that Cher Greenspan also sort of went into some areas where we know that productivity growth has been high and information technology that's where wages have been highest, but very concentrated. It hasn't been

broad based and spread out all over the economy. And that's what we're seeing as well in the data is that even though everyone has a smartphone now, that doesn't necessarily make them all more productive. And having two millennials of my own that are in college, I've seen that that can happen, not always more productive. I think we've all seen that in person. Actually the inverse of productivity exactly. I think that's true. Jersey Diane was talking about the

trajectory of debt. When you look at the sell off in treasuries, there's gonna be a lot of supply coming to market fairly soon as well. How much of this week's sell off is a supply story. I think part of it's a supply story, but we've known that that supply was coming. This morning, the Treasury Department just told us exactly how we'll get it, which is much more in two and three year notes and a lot less than uh in ten and thirty year notes, but they're

still increasing issuance throughout the curve. So there's going to be you know, trillion dollars of debt coming. We know that already. And to Diane's point, I think, you know, we we have this push and pull. One of two things has to happen in order for us to eventually pay our debts. Either um, either we pay more in taxes or we have to somehow inflate our way out of it and have much faster growth. And it's not

obvious how you get that part, Diane. I want to bring up this chart because you've seen the two year leap out to two point one six percent. Do you have in your head, Diane Swung, a critical level of critical threshold for two year yield or ten year yield where it does begin to affect the American economy. I don't have an exact threshold, but I think one of you know, chere Greenspan has always been really good at green speak. And when he said you know when is inflation?

Company said soon? And he said, um, interest rates are going to go up a lot, And it's how much I think, you know, you have to remember that from these old levels, you get back to three percent, you're back in tapered um tantrum territory. That's something we've had recently. You get above three and a half percent, you're talking about a major percentage increase in long term interest rates.

And that's not only an increase in interest expense from all debtors out there, but the interest expense on our debt as well. And so you start to get those kinds of interactions. And I think when you start to get three and a half three and three quarter percent interest rates, even though historically they're low, those are significant, Diane, very quickly. Do we get there before the March f MC meeting, No, I hope not. If we do, then you really have burst the bond market bubble over right.

So UM, I won't say no for sure because I don't know. And if I did, I know to buy an island where they don't have hurricanes. But um, other than that, I just don't know, all right, Diane Swank, honesty, Uh, they're on the markets. Diane Swank of Granthorne in Chicago, thank you so much for joining us. Our Jersey of Bloomberg Intelligence is sticking with us now. Coming up. Bill Gross of Jannis Henderson joins a conversation. We'll talk bond yields,

we'll talk markets, and we'll talk about the Fed. This is the FED decides on Bloomberg TV and radio. This is the FED decides on Bloomberg television and radio. I'm scarlet food from our world headquarters in New York. Still with US is IRA Jersey Bloomberg Intelligence is chief US rates Strategists and IRA. When we look at what Jerome Powell, who will be sworn in as a new FED chair this evening, I believe right, I don't remember tenure begins, tenure begins to Okay, his tenure begins soon. Is it

important for him to establish his independence right away? I mean, we're looking at a rate increase anyway in March, but is that an important marker to set? So one of the things that's gone on with the Federal Reserve over the last couple of years is really um, you know, more control or more um I don't want to say independence, but certainly more input from the other members. So presidents

and governors, you know, certainly they've been out there. When Alan Greenspan was chair, he's what he said that's what the FED said, That's what the FED did. The FED did everything that he wanted and and the FED chair certainly guides things. But Jerome Powell will have his own style.

And will he try and be like Alan Greenspan and and uh, you know, be a little bit less open when it comes to taking another people's ideas, or will he be consuliatory and say, look, if you really think that we should hike rates seven times this year, go ahead and say that, but you know that's not my view.

All right. We also want to bring in Bloomber Economics chief you as economist Carl rick O Donna and Carl, you came prepared with a chart as well to look at some of the things Jerome Power will need to confront when he becomes chair. And one of them, of course,

is this flattening yield curve. Right absolutely so. Well, what I show in the chart on the screen here, uh is basically the two tens spread relative to FED hikes and we can see that under the Greenspan Fed when we got about it was probably about seven hikes into the tightening cycle, always saw a similar flatness in the yield curve. And so this has been a lot of discussion in the marketplace lately that because of the flatness

and the curve, the FED will be constrained. Uh and if the power Fed operates anything like the green Span FED something. I was alluding to green Span Blue right through that and didn't concern himself too much with the uh flatness or eventual inversion of the curve. The FED tightened at least as much thereafter as they did running up to that. You know, one of the things is they can't help this, right, So if the federerser wants to keep on hiking, they're gonna keep on getting flattening.

It's just the way that the market is going to work. Unless they say that they're going to slow down their hikes, you're not likely to see a significant resteepening in the yield curve. Right to the extent that the market has confidence and the FED keeping inflation under control, then you're not going to see that meaningful backup, Where's normal? I think none of us know. There's too many plugins to get to normal. Whether it's a tailor rule or whatever

rule you want to use. How far from normal are we even if we know where it is? I think if we see growth picking up in a more sustained fashion. Uh. In mind you we're not at three percent growth yet, but we're heading towards probably a sustainable pace of two and a half to two and three quarters growth this year, and maybe three percent beyond that. That you're going to see the FED finally tweaking their longer run growth estimates

in the other directions. So if we have confidence that we can get back to two GDP growth, back to two percent inflation, then I think the view of normal, be it trend growth in the economy or the normal level of the FED funds rate start to creep higher as well, then critical over Jersey. What's the markets say to that? I mean, does the market agree with that assessment or they still far apart from the powle Fed.

I well, we we I'm not convinced that we exactly know what the power FED is going to do, but I think the markets anticipating continued continued increases in in hikes. Certainly, you know, we're pricing five ish hikes now over the next two years. That's you know, more or less the uh, the pace that that two year notes is certainly pricing in.

So the question then becomes, you know how much does the other side, how much does supply side wind up dripping into bond yields and pricing, and with much more supply in twos and threes, I'd have to imagine that it's not going to be for a much deeper yield curve. Can you get to normal though, Carl, When you've got the ECB and the b o J staying so accommodative, well,

that complicates the you know, potentially. I think, for example, the movement we've seen in the dollar to date this year has been more determined by b o J, a ECB comments, and necessarily any reassessment of the trajectory for the FEDS. So that's going to be an important moving part in the background. Absolutely, and whether the dollars going up or down really influences the impact of how much

UH normalization the FED has to pursue as well. So if we see the dollar which is down about ten percent year on year, if that friend is continuing, that's right, the inflationary it's gonna be pro growth and it's going to mean that the pal FED may have to do a little more rather than a little less. I want to introduce his chart right now, We're gonna use this with Mr gross here in a little bit, but I

want to use it with Mr Jersey right now. We quote yield yield, yield yield at Bloomberg surveillance all day, Scarlett screaming at me. Quote price sometime talk to you. So here's price. Back to Thanksgiving, the white circle and Ira Jersey. I'm sorry. If it is a bear market, it looks like a bear market. When is there a bear market in bonds? Price down, yield up. It's three point six percent down from Thanksgiving and annualized n down.

How do you know when you're in a bond bear market? Well, so, so the price is down, but you also get income at the same time. We're we're in a bear market, if you want to call it that, because prices will probably continue to fall modestly. What's what's interesting is that over the last thirty years, we've never had a two year period where we've had negative returns for um for

for treasury securities. And I think that that's important because what ten to happen is you get these sharp sell offs, they wind up lasting for a couple of months, and then you'll and then the bond yield stabilizes, and when they as they stabilize, you continue to get interest on it, and you wind up building back up some kind of some some income. And so so how long will this last? It could last a long time. I'm a little skeptical that we're going to see this disaster uber high yields.

We're gonna see four percent ten year fields. I don't think that that. Being said, this year has been terrible for bond so far. Where are you on the idea of the percentage of the strategists you read, the economists you read to think we're gonna blow through bill gross is two point and go on to a true higher yield regime. I don't think we're going into a meaningfully higher yield regime now exactly. We have to see a

much more pronounced uptaket inflation. So what we're trending in a positive direction, that doesn't mean we're blowing the doors off to any degree that would justify really substantial bartment. Mind you, how much debt is out there, whether it's household debt at floating great UH, mortgages and whatnot, a little bit of backup and rates will really take a toll on intersensitive spending in the economy, household or corporate. This is the FED desides on Bloomberg Television and Bloomberg Radio.

We're with Bloomberg Economics chief US economists called Rick and Donna. Also with us is our Jersey Bloomberg Intelligence chief rates strategists. We were talking about the move higher and yield to move down in bond prices. Our wire is going to start emerging as the spread between US treasuries and Eurozone yields gets wider and wider and we get to that three percent, because that's what we've seen in the past. It's been a consistent reaction, right, It's what we've seen

in the past. It's what we saw. Going back to the chart I brought with me about the Greenspan FED and the flattening of the curve, if not inversion, there is a global glut of capital slashing around looking for higher returns. UH. And so I think that the you know, we talk about economic fundamentals be a growth and inflation driving the dynamics of the treasury yield curve, but we also have to factor in UH foreign capital flows, and

I think that could be a very important driver this year. UH. Not only given the fluctuations in the currency and that surplus of capital. But one particular policy this repatriation of foreign earnings, which is incentivized by the tax reforms. And so we could look back to, for instance, the two thousand one to two thousand seven cycle. The dollar was continually weakening over that period, with the exception of two years.

In those two years were the period where we were incentivizing repatriation of foreign earnings in that period as well. So I think that all of that cash flowing back into the US helps to grease the skids for President Trump to uh pursue a more aggressive, more expansive uh fiscal I just want to say Scarlett for Bloomberg Radio and putting out that boom price chart right now just as we get down pricedown pricedown yield up. That's my Frobosi moment for the day. Continue while I put this

out for Bloomberg Radio. So I'd just like to add something so we keep on talking about, you know, high interest rates, what's going to happen because we have two

year yields going up. I think it's important to note that the structure of the economy has changed over the last twenty years, where a lot of both governments in the United States and municipal governments as well as corporations have extended the amount of depth that they have, so they've extended their term and they've really used the last seven years or so to do quite a lot of that. So I think it might take a little longer than some people realize for higher interest rates to really filter

in to the real economy. So you think, look at things like weighted average cost of capital for corporations, that's not going to go up the same way as it did when they were funded twenty or with like on loans in commercial but then with the mergers and acquisitions, now you see it was Snapple and the rest of them Dr Pepper Snapple in the last number of days. Are they looking at yields as a nominal cost or they look at it really you which are basically were

given money away? Well, I think, and they probably use a lot of nominal costs, but the fact is real yields are next enough. Really yields do matter, yeah, for sure in a lot of people's minds, but that only in so far as they can actually pass along price increases. So the question is how much of the price increases and wage pressures, for example, can be passed along the consumer. It's certainly one of the things that's been keeping things down.

But you know, Carl did a great piece today on the employment costs index, and you know, maybe, um, you know, maybe if if employment costs keep on going up, one of two things has to happen. Either you get more inflation or you get margin pressure. One is okay for things like equity markets and corporate debt. One is not. Yeah, certainly, I want to go back to a point about how things get pushed out, because structurally the economy is different than what it was before. How much time did companies

did governments buy with the ability to push things out further? Well? So so in uh SO the US government, for example, they extended their average maturity from about three and a half years to almost six years in terms of uh in terms of average maturity of their debt, So basically they bought themselves a lot of time. They basically said, Okay, interest rates are super low, we're going to cut two

in three year debt. Back in two thousand, thirteen and fourteen, they cut the amount of short term debt that they were issuing, and they issued a lot of long term debt, so their liabilities now are far longer. Now they are worried about, you know, certain walls of maturities, and now that they're issuing more debt in the front end. Um, you know this is a problem, but it gets pushed out a little further. So my point there was, you know, how much of today's hikes are going to be built

into the economy in six months. It's not obvious to me that six months anymore. These long and variable legs that monetary policy takes might be even longer than the Fed even things. How worried should we be about funding the government and the debt ceiling? Carl, It seems like we're really worried about it earlier this month than they kicked the can down the road for a couple of weeks and we kind of all forgot about it, went

back to watching the stock market rise. Well, I think you know, as we kicked that can closer and closer to midterm elections, people are not going to be willing to shut down the government and then potentially face the comment that uh come November. More broadly, as we think about government funding, I mean, if you look at UH, you know, and I will say, don't use these at traditional models. But if we look at just the nominal GDP growth versus a tenure yield, uh, there's a pretty

good correlation over the broad history of time. UH. And if you look in the last five years or so, you can see that tenure yields are low relative to those economic fundamentals. And that's giving you a free pass to increase issue with bring up this chart. I don't have a banner for it, but we don't need what our jersey helped me here with how distorted we are in these times. This is the price of apple paper out to two thousand thirty. That's paying three quarters of

a percent per year in Swiss Frank's. You have to pay up a premium to own this thing. It was up at one ten, it's done at one one. I mean, that's just one example of the distortions in your world. Sure, and when you look at places like other currencies, we have to remember the funding in those currencies matter, for for one thing. So Swiss rates are lower than US

rates are lower than US rates for example. UM. But you know, the question is are you willing to buy Swiss francs and make that amount of money, and if you do all the hedges that you have to do to hedge out your currency risk, you'll realize that if you were to buy that Swiss frank that you're only making you're only making a little bit less than you are to buy treasury. So you know it's not as distorted as you might think. Iro Jersey with us in.

Carl Ricka done as well from Bloomberg. As we discuss here these interesting times in economics, investment in finance. When Dan Fuss speaks, Bill Gross listens, we know that for certain,

here is the legend of loomas sales. Assuming our economy stays as strong as it seems to be, and assuming that inflation rates gradually climb, and I suspect there's a slight lay in the inflation rates, uh, then I would expect the Fed to keep going the The open question then becomes, well, you know how far how long um does the jenior go to flour? That's a stretch. Dan Fuss speaking the gospel, according to Bill Gross, who were pleased that Mr Gross joins us today from Janis Anderson,

Bill agree with me. It's always good to hear from Dan Fuss with the experiment as well is experience. Rather, we've seen price down, yield up. Let me cut to the shakes bill gross. Are we in a bun bear market? Well, I think we all. I think we've been there for that a few months ago, and I think there are a number of reasons for that time. Although I would, um, you know, suggest that the bear market to see is probably a mild one with the tenure going to three percent.

But let's let's put some of the pieces together. In terms of the police nominal GDP is moving higher from four percent, which is savage for the US five years, so about five. Um. You know, inflation is moving slightly higher, as the Fed noted today, and I think ultimately, um, you know, the treasury in terms of the budget deficit is perhaps an important factor as well that many analysts

have failed to mention. You know, the Treasury is going to be issuing about five billion dollars more more this year than they did last year, and that's because the deficit is moving up to you close to a trillion dollars. And that's because you know, basically that the fit itself is reducing its balance sheet and so you know, I wonder who will buy you know the current level of bonds, uh, you know, relative to what has happened in the past,

because in the past central banks have bought. In the future, the private market is going to be forced to buy Bill Gross. We've heard from Martin fell Steine today of Harvard and also Chairman Greenspan, and both of them have great concern over consecutive and maybe even more than consecutive trillion dollar deficits. Do you change how you manage money because in twenty four months Ill Gross is going to

enjoy a trillion dollar US deficit? Well, I think you know, investor has to do that if you're a vigilante, And I would suggest that the bond vigilantes are sort of down the list in terms of control or power relative to what they used to have. Central banks basically are on charge um. But a trillion dollar deficit, to my way of thinking, you know, entails a substantial supply, a

new supply as I just suggested of treasuries. And uh, if the FIT is not buying, actually the FIT is selling and reducing this balance sheet, then then who will buy? And so it takes a higher interest rate to my way of thinking, supplying command, It takes a higher interest right forward demand to meet supply going forward. Now, I want to get your thoughts on what we've seen the

last days with regards to markets and equity markets. In particular, it was, if you want to be generous, a sell off in U s Ox because the doubt had its biggest two day decline since before President Trump was elected. Do you take anything away from that or was this a long awaited consolidation? Well, I think some of the latter. I suppose along awaited consolidation. But I think what is driving that consolidation is the realization that the yields will

be moving higher on the tenure um. You know, just several weeks ago they were at two point five percent, now they're at the two point seven And does that matter? You know? I think many pundits suggest that, you know, it'll take a four percent ten youre treasury to affect the market. I don't think so. I think the economy is significant. A three percent treasury will begin to affect you know, relative valuations in terms of stocks, in terms

of utility prices, etcetera, etcetera. You know, I think it's all due to the bond market. I think there's a good correlation now and if treasury yields higher, and perhaps stocks will continue to consolidate or move a little bit lower. Right. We've also seen Wall Street banks, credit Switee among them forecasting this shift from pensions into fixeding comassets from equities, especially after the big run up we've seen in US

stocks this year. Do you see it playing out the way that they expect or are the returns and bonds still too low for that? Well? I think that's the case, you know. I think a astute pension fund manager would probably want to take some gains and put some of that back into bonds. But the return on bonds just the same is probably not attractive to UH pension managers, but it helps them to basically, uh, you know, solidify

their duration or match their durations. Um. You know, what is the tenure holder of treasuries or a holder of tenure of treasures expect for the next year. You know, if it moves to three percent, you're gonna get two point seven five percent in terms of interests and lose about two point seven five in terms of price. So there's nothing there in terms of treasuries either. No, let me bring up this chart we showed earlier. Bill Gross, we say good morning and a good afternoon to all

of you around the world. On Bloomberg Television and Radio, William Gross of Janis Henderson with us with our Carl, RecA, Donna and Ira Jersey as well. Bill. It's just simply the ten year yield and down, down we go Bloomberg Radio. I put this out on Twitter for you. This is price price down bills. Aware of this. It's an unconstrained moved down in the price of the ten year yield bill. Gross.

This is all LinkedIn and correlated to other markets. How did you respond to the week dollar policy of Mr Manutian, the President's adjustment to an ultimately strong dollar policy, and how does that fold into what you do unconstrained every day at Janis Henderson, Well, Tom, I I don't listen to much to UH, to President Trump or minut in terms of what policy they want. I think they speak with forked tongue or with UH, you know, different scenarios

in order to please the market. I think what's important in terms of the dollar, and we know the dollar has been down ten percent basically over the past twelve months relative to other currencies, is the budget deficit If if we're moving to a trillion dollars, that's basically you know, scares foreign investors in terms of holding dollars because it

means you know that the fiscal situation is deteriorating. So I think I would pay more attention to, you know, perhaps the success or lack of success of the infrastructure program advanced last night, and the fact that even without that, you know, we're headed towards a trillion dollars in terms of a deficit, and a week dollar is probably what we should expect as opposed to a strong dollar. So within that a week dollar in higher yields, maybe up

to a bracket at two point three percent yield. Does Bill Gross just assume more volatility for investors in the next twelve months, Yeah, I think a little bit more times, certainly on the on the stock side. I mean, the vix got so low down to about nine, and now it's moving appreciably higher. On the bond market to volatility

got low. Um. I don't think we're in a period of time in which volatility spikes significantly higher because central banks are still in control, and if things got out of hand in terms of yields are out of hand, in terms of lower stock prices than to fit you probably wouldn't increase interest rates by the expected three or four times. I simply think they're going up by one or two times in you know, two thousand and eighteen, and that should dampen volatility significantly. Well, we'll see how

that all plays out. Bill Gross of Janis Henderson, thank you for your time. We want to get our final thoughts now from our Jersey of Bloomberrick Intelligence and calrickt Down of Bloombrick Economics. And I let's start with Jenny Allen's legacy because most people great her very highly when it comes to managing the economy and managing the transition back to normalization. How are you want to define it? But there are some criticisms about how Yelling performed at

the politics of her role. Yeah, so so I think Jenny Yellen was great in the fact that she went from a uber accommodative policy and said, hey, we don't need this ubercommodative policy. When she came in, we all thought she was going to be very doublish, because she was when she was president of the San Francisco Fed so and and she wasn't. But when she brought up things to Congress like um typical fiscal type of things

like income in equality, for example. She was criticized for that, and I think that damaged her reputation with some members of Congress. Now Jerome Powell is coming in and he might have a friendly Congress this year, but we're not sure after the midterm elections what will happen next year. You agree with Ira Jersey, there's a mystery to German Paul.

I think that obviously he's untested in the seat, and even when he was just a governor, he had a sparse public so there is some degree regulatory based, right, very regulatory based. Um. What we have heard from him on the economy seems very consistent with Yelling's view of the world, maybe a tad bit more hawkish than Yelling has been. And we also know that he was a little bit less of a proponent of the unconventional policy of quantitative easing relative to Chair Yelling. So in peacetime

that should do the spine. If the economy rolls over in a bad way, then that would be really I love that in peacetime called Rick a donna, don't break economic economics. Chief of US economists of course, Iron Jersey, chief rates strategists here for us at bloom Rick Intelligence. 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 a