Surveillance: Taper Timing With Fed's Williams

alongside Bloomberg's Michael McKee. President Williams, always great to catch up with you, sir, and if you don't mind going to start the conversation with the quote of yours you went on to say, in the last day or so, from my perspective, we are quite a ways from achieving my interpretation of substantial further progress. So President Williams, I imagine you anticipated this trillion dollar question, what is substantial

further progress? Well, you know that's something will be analyzed and I'll be studying very carefully looking at the progress we're making about getting back to maximum employment and also our goals around a two inflation on average over time. So it's really looking at all the data that indicators and really seeing that actual achieved progress both in terms of employment and also in terms of underlying inflation trans

back to two. So it's really looking carefully at all the um data and indicators and assessing that to come to conclusion. President Williams, for the benefit of our audience on radio, as I asked that question, you smiled because clearly you anticipate to there. I just wonder why keeping what constitutes substantial further progress vague is a feature and

not a bug of policy. Well, you know, it's we we are not following some mechanical formula for making monetary policy that we have to look at a wide range of information and different indicators, and we also have to think about where the uncertainties and risks to the outlook are too. So I wouldn't say it's a a. I think it's pretty clear. We've laid out very clear indicators about how we think about maximum employment and price stability UH. But it's there's no kind of a numerical UH threshold

or something that we're looking at. We're really looking at the full set of data around around these goals and taking into count all the extreme you know, extraordinarily high levels of uncertainty uh in the economy that we've experienced for the past year and a half and uh and we're continue to experience as the economy reopens. Well, John the there's a lot of uncertainty, but that stern taskmaster J.

Powell makes you write down your forecasts. And I'm just wondering on the FED spectrum from the Survey of Economic Projections, what you think growth will be this year and in two thousand twenty two, and what do you think PC inflation will be. Well, you know, we're seeing you know, great um, you know, signs of the reopening of the economy in the past several months. So I have an uh pretty optimistic view of what GDP growth will look

like this year. Uh So my my view is the growth will be about seven percent on a Q four of a Q four basis for real GDP, which is the best number if you know that forecast is true, that will be the best number since nineteen eight four. So I feel very good about you know, the progress we're making on vaccinations, on growth supported by strong fiscal support.

And so that's that's my forecast. And I see the unemployment rate coming down to around four and a half percent by the end of the year, which is again really great UM signs of progress. Looking to next year,

I think growth will be uh GDP. Growth will probably be around three to three and a half percent UM slower than this year because we're not going to get as much of that reopening dynamic and some of the very strong fiscal support we saw last year and this year will be I mean uh next year in terms of its contribution to growth, I still see the end the labor market continuing to recover next year, and employment

trending down. In terms of inflation, you know, I do see the very um you know shark rice and prices we've seen in the past few months is mostly temporary. So after inflation being at three percent or so this year, I expect both core and overall inflation rates to come back down next year to around two as some of the reopening dynamics you know UM play out and some of these big increases in some of these prices like

used cars and things like that subside. Well, let's let me put it the way the FED has always put it. If the economy performs as you expect, would it be likely that we would see you begin to taper in

the fourth quarter of this year or is that too early. Well, it's really going to be driven by the day to you know, Mike, you know, you know, I'm very data dependent in my views on policy, and right now we're still in the midst of just a really an extraordinary and positive set of developments in terms of the economy, in terms of vaccinations and other things. So right now it's really about watching the data, seeing how quickly this economy can recover and get back to you know, uh,

to its full potential. And so any views I have about when, um, you know, when we'll get to that point that we can start uh slowing the pace of our asset purchases, that will be driven really like what what's happening in the data, the as I mentioned before, the kind of the risks they're out there, and in terms of the economic outlook, and and doing it in a way hope that you know, really will be uh communicated very transparently and done in a very orderly way.

So that's that's how I view that the timings can be driven by the you know, how how the data evolved, and really my focus is on providing the appropriate amount of monetary support for full and complete economic recovery and with inflation averaging two person, Well, let's talk a little bit about what's appropriate. What do we get for a hundred and twenty billion dollars right now a month in purchases that we wouldn't get from less given the state

of the economy. And are you worried that the minute you announced that you might begin tapering, we get a taper tantrum. Does that keep you pinned in place? Well, you know, we really, in my view, we need to focus on getting monte policy in the right place to support the very strong economic recovery. Um. And you know,

the ur two percent inflation goal. I think, you know, one of the lessons from the experience of the taper from years ago is the importance of uh, you know, not only getting the right decision at the right time for the decision, but also you know, doing our very best to communicate that has transparently uh and um, you know kind of clearly to the public. I do think that you know, this is this time we have a

really strong economy. Uh. In terms of the recovery, the pace of recovery is of a long ways to go to get to maximum employment. But we're on a very good track for that. And I think that in the context of a strong recovery UM and a good economic, very good economic outlook, then we can you know, we can adjust Monterey policy hopefully without any undo market um uh, you know, turmoil or things like that you just mentioned.

President Williams might cast that question and already polite fashion, so I'll be a little bit more plund Does this housing market in America need the FED support? Well, you know, the obviously the housing market is one of the key drivers, along with consumer spending in business investment, of the strong

growth UM. Now, my view is the monetary accommodation that we're providing, both in terms of little very low event funds rate and also our asset purchases is supporting overall financial conditions, really lowering the cost of um, you know,

financing for households, for businesses in general. It's not you know, specifically targeted to you know, do the housing market UM in terms you know, My my view one this is we need to focus on our maximum employment and price stability goals and and as the economy um you know, makes this substantial, further progress on those goals, we can make decisions around adjusting asset purchases and and then further

down the road in terms of our interest rates. So it's really my focus is on on those goals where it's not really about supporting or not supporting the housing market in particular. Just a little hint from you there on what your view might be when it does come the time to reduce asset purchases on the composition of that reduction, President is re biased to reduce say the purchase of mbs the treasuries or what I'm hearing from you,

maybe not. Well, you know, those are the issues that we need to think about in terms of not only the timing of the adjustment of the of the purchase pace, but the timing over which that would happen, and also the composition of any adjustments that we, you know, we make. So those are issues that we need to analyze very careful, we um and think through in terms of again achieving

or a maximum employment and price supportability. But you're talking about it right now because the chairman told us so, President Williams, from your standpoint, what is the optimal approach to that conversation? The optimal approach to the conversation around the asset purchases. Yeah, well I think we just you know,

we do what we do, very are the best. We analyze all the data, analyze the options we have in front of us, and and really focus on the big picture of our the goals that we're trying to achieve, the progress for making on those, and how to best um set our policy, um, you know, instruments as we can to achieve those goals. Will forgive me for jumping

in because you're too good at this. When it comes to the asset purchase program, do you view it as a hundred and twenty billion a month or a mix of purchases that needs to be reduced independent of one another. Would you hit focus on MBS of a treasuries treasury over MBS or do you just look at the whole package that needs to be reduced equally? What's the optimal approach to that? Oh? Yeah, so you know, I clearly see them the to supporting a comedy of financial conditions broadly.

So that's that's how I think about thinking to your question, Now, can we do we have options in terms of adjusting them? Um in different ways? The different the purchases of nbs and and treasuries. Clearly we have options to do that. From my point of view, the main purpose of these is really to provide strong support for that kind of Well, John, if you do start the tapering process, do you go through tapering completely before you get to rate increases? Do

you stop QUIE purchases altogether before you would consider raising rates? Well, mikecause you know, you know, last time, we we had a sequence of of UH decisions that were made around that. I think this time, you know, clearly we can UM. We've learned a lot from the experience of UH, the slowing of the asset purchases last time, and then eventually the normalization monetary policy. So those are lessons that I

think are important to take. But you know, this time is very different to the economic of the recession, the recovery, or just very different from the global financial crisis because of the you know, the nature have been driven by the pandemic. So I think it's really important that we don't sit here and just think like what's going to happen necessarily a year or two years ahead and think through exactly all of those but really watch the data

see how the economy evolves. And see how our policy you know, decisions can best support the achievement of our goals. So those are those are you know, issues that will obviously think about carefully, but also they're they're well off in the future, and we really should be based on how the economy is evolving rather than um, you know, kind of where where things are right now in June. Well, let's talk about the raising interest rates and your view on it. Where is your dot did you move it

at the last meeting? Are you in two thousand twenty two, two thousand twenty three? And you're not going to be surprised by my answers. I'm not going to talk about my specific you know view. It's as the chair uh you know put uh you know has said on last week is um uh that you know, these are just projections based on a modal outlook. Each person comes into

the meeting and has a view on that. And so you know, I don't think really right now that the key issue for the FMC is, you know, when when is the economy going to get to this point where we meet these um you know, these uh, these conditions that we've set out in the FMC statement about time for for the lift off of the funds rate, that's still a way off in the future right now. Really, I think the attention is on the on the table. In terms of my own views, my focus is really

on the framework. Is our new policy framework introduced last year is I think positions is really well to deal with the situations that we're dealing with today and will over the next few years. And I think our FOMC guidance around the funds rate is is a very strong

place to be. And that's you know, so when we get to that point where the economy is is meeting those um, you know, conditions we've laid out in the FROMC steam, you know, I think that's when we'll get to the discussion about whether the Fed funds right, Um, you know, what's the appropriate stance of the Fed funds right? That's still quite a waste off from today. Well, if you won't tell us where your dad is, let me

ask it this way. You were quite bullish yesterday in your speech, and yet we're still quite a ways from substantial further progress. Are we getting to that substantial further progress more quickly than you thought? Does the economy's speed uh surprise you? And is the inflation number to you surprising, Well, let me start with the inflation. Clearly inflation, that recent

inflation number has been very high. Um. That's and you know obviously get a lot of attention, uh from us and from everybody, and and really being we need to be very careful watching that data. See to what extent these are just you know, transitory temporary factors or or do they you know, still into underlying inflation over the next few years. So clearly inflation has moved up quite a bit. That's something that's um, you know, part of

the picture. In terms of employment, you know, I do tend to go back to indicators like UM, the employment of population ratio UM and the unemployment rate and a lot of other indicators of the health of the labor market. And we have made you know, progress for sure since December of last year. But you know that progress is still I still don't think it's close to the substantial

further progress that we set out on. And you know, really it's gonna you know, my views on this we depend on how the data evolve over you know, overcoming months. You know, see can the are we adding a large number of jobs? We see employment of population continue to move back up, and watching obviously all the other cares

as well. So I'm really focused on employment because that's what our mandate is, and are we making really strong progress towards UH, the maximum employment goal that we have John. When it comes to the participation rate in the US labor market, do you have any conviction around what that looks like, how that progresses through the next twelve months. How unknown is that? Yeah, that's that's obviously a really hard quest. And UM participation changes for variety of reasons.

We've seen a lot of churn in the labor market in the in the past few months, people exiting the labor market, coming in, you know, a lot happening with the reopening of the economy, UH and and all the events of the past year and a half of the pandemic. So I think right now it's hard to get a

clear read on the underlying trends. I do tend to look at, you know, one category UM in the data, which is the employment of population for twenty five to fifty four year olds, which probably you know, more in the middle of people's careers. And you know, if you look back before the UM, you know, before the pandemic that was over eight percent, So I think that, you know, hopefully we can get back towards the number like that.

But um, and you know, for the overall population, we have seen uh, some retirements from some older workers, where I think we have to carefully analyze that data to see if that's um, you know, shifted the trans somewhat in terms of lay before participation. So I think, you know, we have to just look at the data. Are employee analyze it, um, and you come to our best assessment

of what you know, a maximum employment was. Now. One thing I just wanted to say is we had an unemployment rate of three and a half percent before the pandemic. We had very strong labor force participation UM. And I don't see any reason, um that our economy can't reattain a really strong labor market similar to that. It may be slightly different in terms of participation in some of the other issues, but it should still be an economy that is really a very strong one with maximum employment

Indian with our two percentization. It coming forward from here, President Williams, as you know, you do get a lot of criticism over the current policy stance, and often the federal reserve will bring up the labor markets support the current policy stance. We had a story from the Wall Street Journal this morning on black Stone agreeing to buy a company that buys some rents single family homes and a six billion dollars deal. This is Wall Street competing

with Main Street for single family homes. It's the Federal reserve. Part of the problem when it comes to this, Well, in know this we're doing, you know, conducting monetary policy, which is really just really about setting interest rates and supporting the strong economic recovery and our inflation goals. You know, there's always developments in the markets that um um, you know, or maybe they're affected somewhat by interest rates, but I

think are really driven by other factors. And it just remind people to, you know, when we think about why interest rates are so low and maybe how people behaving around very low interest rates, I think, I keep part of this is is that this is a structural change

in our the global economy. We have very low interest rates globally, not just because the FED is holding interest rates lower right now to support the recovery, which we're doing, but even once the economy is fully recovered, we've achieved our goals, the neutral or kind of longer run interest

rate is still very low. So I think just when we watch, you know, kind of things like this, we have to keep in mind that part of low interest rates is is obviously the intentional by FED policy, but part of it is really a big part of the decline interests race over the past few decades is driven by more structural things like demographics and proctivity. Usage of the feds overnight reverse repo facility has surged to hit

a record yesterday seven sixty five billion. Why isn't that a signal that there is too much cash in the markets and you don't need to add more. Well, the goal here is not to add cash to the markets. Markets is through uh you know, with our asset purchases, is to provide really strong um financial conditions to support

economic growth. And effect of that is that um, you know that our purchases of assets, UM and other other developments tend have been pushing uh, you know, up the amount of reserves that would be in the banking system. Now we've we created the overnight reverse repo facility, which you just mentioned years ago, uh, specifically to make sure that interest rates are in the range that the FMC set.

So the FMCS at a target range for the bed funds rate of zero tooint flap basis points, and it's you know, we want to make sure the interest rates stay well within that range and not all below it or not be above it. And so one of the ways that we do that is by through the overnight reverse repo putting a floor on on interest rates. So what we're seeing here is I think of the natural operation of of uh you know this UM kind of arrangements that we've set up to control interest rates. So

you know, banks can hold reserves UH and do that. UM. We the FED UM and they offered you know, deposit rates and other services to their customers. UH. Customers look at what the banks are offering into terms and deposit rates. They also look at money market mutual funds and other investments and think about where is it best to park their cash. So we see a natural movement between these two.

Especially with the large amount of reserves, we're seeing UH investors move finding the money market mutual fund UH, so UM, you know, option more advantageous, and so we're seeing a lot more money moving the overnight reverse repot facility. And that has shifted over time. That's exactly how the system is supposed to work. Interest rates well within the range, just as the FOMC wants, and we're not seeing any problems with market functioning or anything. It's it's working exactly

it's assigned. And I'm not concerned about the large amount of overnight reverse reposess. That's exactly what you'd expect, even you know, conditions in money markets. So this is a I think a good sign. President Williams, You've been kind with your time and it's always try to catch up. We appreciate It's the President of the New York Fed, John Williams there alongside Mike McKay. It is the way

it is gotten there. And of course this is all about the microeconomics and the underpinning of supply and demand. Someone expert on this and consistent in well written thought as Francisco blanche a Bank of America Securities head of Global Commodities and Derivative Research. I want to go right away, Francisco to what is less talked about, and that is a demand I MAC, what do you envision to be the demand dynamic that gets you to your acclaimed a

hundred dollars of barrel. Hey Tom, Hey, thanks for having me. So three things are key here. First, there's a lot of pent up demand. We've all been looked up in our living rooms in my case, but really with very little movement, whether it's business or personal. There's a huge amount of pent up demand that we're already seeing in the US. The rest of the world's going to join soon. Europe is maybe a couple of months behind. An emerging markets are between six and folve months behind the US.

They're the big laggers, but we think they're gonna come back in in a in a huge way over the next twelve months as vaccines get get distributed. Second reason, Tom is really around what what we what we call the avoidance of mass transit. People are gonna be using more private vehicles, avoid subways and buses for an excellent period of time. Third, recent really is what we call the new work from home or as we put it, work from a car situation. People are gonna be can

remotely one or twodays a week in the future. Um, and that's going to lead to more driving, not less driving. In in our view again, and we're based in this opinion on on estimates pre pandemic and studies pre pandemic that suggested that one or two days of working home eventually leads to more no less driving. Those are the

three main reasons on the man side. Town of course, on the flip side, when it comes to the demand picture, business travel not coming back as quickly, with a lot of companies saying that they are going to return to just small fractions of what they used to do. How much does that factor into your estimates? Well, so, business travels is a big factor for airlines, but let me just give you one data. Uh in average travel was roughly two point three million passengers per day going through

p s A checkpoints. We are back at two million, and we still don't have any business travel going on. So clearly, I think the pent up demand story seems to me is going to overwhelm the business travel story, at least over the course of the next flo eighteen months. I'm not claiming I'm not claiming this will last forever, but I think I think there's there's gonna be a

huge search here over over the next few quarters. On the flip side, the supply picture, we have this morning a story about how Russia is arguing potentially for an opaque plus supply increase, a boost based on this increase in demand. You're starting to hear about shale producers eyeing what it would look like to bring a little bit more production online. How much do you expect that to accelerate. How does that affect the hundred dollars a barrel call?

So so it certainly does. Um My, my expectation with regards to shale is that we are going to be see We're gonna see producers lagging for the most part. Remember, there's three elements of this that on the nonopic side that are going to hold back supply. Number one is the fact that government policies are going to pressure companies to invest less right. We are seeing that with international and eng Agency coin for it and two oil and

gas investments to meet partis colin of goals. Second reason is we are seeing investors pressuring companies, whether it's for financial reasons to see more more cash balls coming back or for e sd reasons to reduce investment. And the third element really is the jewiciary. We were now seen with the case of shell Um that the jewiciary can also get involved and force you legally to reduce your emissions with regards to OPEC, it is the big risk in our call. Does OPEC discipline hold? My guess it

probably will. Remember we've only average sixty four doors barrel so part this year the average open budgets at seventies. So they just they want to make up for the lost last year in terms of in terms of ground, Francisco. As we speak, bitcoin bakes down, Brad. Maybe we've got an internet chart a bitcoin to help us out here. We've had people on Bloomberg talking up bitcoin. It's stability, Francisco. I want to cut to the chase, a grizzled pro like you. Is bitcoin linked to gold? Is there a

compare and contrast, a correlation, a relationship a bitcoin to gold? Okay, so let me let me get to a chase. You know, I put a pretty pretty negative piece on bitcoin back in March entitled Bitcoins Dirty Little Secrets, where I argued that bitcoin had serious environmental issues and obviously there was a big new turning. Agrees with you, and China agrees with us too as well, of course, because they are burning a huge amount of call to produce those those

bitcoin to mind those bitcoins. Um, this is my take on bitcoin. Bitcoin it was completely uncorrelated to other asset classes. It became more of a risk asset in the past love months. It was highly correlated to equities, to Mexican pay so to cover um and and gold is a safe asset. Is typically correlated to ten your treasuries to Japanese yend. So to your question, our bitcoin and and gold linked in a way. They are because one is a risk asset, it runs a safe asset, so so

they're they're very different characteristics. Now, what is going to be the long run story for bitcoin, I don't know. What I know now is there's a risk asset and golds are safe. Fact Um and gold spin a safe facet for a very very long period of time. So I'm pretty confident gold stage a safe facet. Bitcoin could could keep changing, but for now they're inversely correlated, quite inversely correlated. Francisco, you make it such a such a

good point, and I want to finish on this. You can have a risk on asset and a risk off asset, both in inflation re environment. So you can be risk on in an inflationary environment and it likes a bitcoin as well, and risk off in an inflation real environment and the likes of gold should do. What is that what you're saying, Francisco? Not not quite, I guess, not quite what I'm saying. And I'm not sure I see

bitcoin as an inflationary asset. Okay, I think. I think bitcoin if you look at the correlations to five year five year forwards. If you look at correlation, then your inflation. You look at correlation CPI, there is not much there. I think. I think what bitcoins is good, uh work is this is creating a new ecosystem of value transfer. Um is creating a new a new economic organization based on the stakeholder economy as opposed to the shareholder economy

that we have today. And again Bitcoin is the base of that, built on Ethereum, built on the rest of other coins that are coming behind it. That's what I think is ultimately going to shape up. It's it's basically communities of people that transfer value using the script occurrencies. Which is why the I R. S is so interested in taxing this because they realize there is a lot of economic activity, real economic activity, not just not just

um criminal gangs. It's also a lot of people that are actually transferring with its uh you know, music or videos or anything they produced via the digital ass world. It's it's clarified, isn't it. Francisco, thank you sir. It's got to see it. A thank you sir from thank America right now. And this is a joy to bring a bigor chot of Deutsche Bank, their chief global strategist tons to talk about in a three hour conversation with making Out, we'll bring in a little tight and biking.

I want to first shout out the invention of modern Deutsche Bank strategy and economics. You guys are on fire. David Folkers land Out is looking out three and four years to inflation. Your colleague George Sarah Ellis is near term maybe going the other way. Are you caught in the middle between dfl and Sarah Ellos? I think I

wouldn't describe it as being caught in the middle. I mean, I think you know, if you take an issue like inflation, which we really haven't had for fifty years now, you know it's it's the most reasonable outcome is that reasonable people will have very different views. And uh, I think that's exactly where we are. We've got a baseline view that inflation is a risk, and just that a risk. But I think the risk, you know, the tails up pretty fat. And I think that's the key point. Thinking.

We've had Wells Farnka on this morning, Federated on this morning, and when they are confronting the question whether you want to be long banks or big tech, they come to the banks, are you I'm I'm long the financials and and and and and the banks. I'm also long energy. I think, you know, one of the dynamics that one needs to keep in mind over the last eighteen months or so is that, you know, this is not a market that has, you know, except for the very early part,

you know, trended very nicely. It's been a series of step functions. And so you know, when I look at the SMP five hundred, and I asked myself, what's not priced in and and and I would argue, you know, it's it's oil prices. I would argue, there's plenty of upside on you know, the global recovery continuing, especially if the dollar falls. Keep in mind that you know, you need three percent down on the trade really dollar to

get ten percent in the oil prices. So I think it's very very reasonable that we will see eighty dollar oil by the end of the year. Uh and the other thing that's not priced in and that's completely out of whack or rates and and and so you want

to be long basically the financials. Other than that, I would be pretty careful here, and I would say, you know, we continue basically to look for no a sizeable pullback, not the mini version that we had on Friday, uh and and and and you know that's gonna hurt both the financials and energy. But we can have independent moves oil prices and rates simply because of you know, where we are relative to where we can. Let's build on that banking you went on a tour of the asset classes.

There can that banks call happen independent of what happens in right or is it dependent on what happens in rights? I think it is dependent on rates, because I mean, if you just look at the last eighteen months, financials have been trading, you know, very very closely with the US ten year yield uh and and and so the pullback is in the financial relative to the market is you know, very easily explained by simply what's happened to

the ten year yield? Coming off, it's hots Binkie. At the core here, there is a tension between growth and inflation, two different things that are often conflated. And we're seeing inflation as you see oil prices heading towards eighty dollars of barrel at the end of the year, and we see it in certain commodities, which possibly is what China is responding to with selling from its strategic reserves of copper.

But we're wondering how much this is asset price inflation, whether this is inflation of key goods that leads to SAG inflation, as your colleague George Saravellos seems to suggest. When do we have a sense of that, I would say, you know, stag inflation really has two parts to it, so the first being growth. I think the key issue and point here is that you know, growth generally peaks, uh you know, about a year into the recovery. That's

kind of where we are. If you look at our House Economics forecast, if you look the Consensus Economics forecast, you know it growth rates a mental peak in the second quarter, and the stronger the second quarter is the more likely, uh, you know, the sharper the peak is going to be um and and I think that you know, there are always differences in every cycle. And and uh, you know, the market has so far sort of diminished the peak or you know, it's sort of ignored and

shrugged off basically the peak growth thesis. Uh. And that's because you know, we have this big gap between goods and services right now. But I think anybody's investment thesis at this stage, you know, needs to confront a very simple chart. You have a retail sales growing for five years four percent trend rate. It's nominal, you know, purchases of goods and and and if you ask you know, where are we today? We are ten percentage points above

the trend line. And that strongly argues for you know, not only slow or but very likely slow growth on the good side. So the big question is, you know what's going to happen on the services side, and and and and sure there will be an expansion, but services don't tend to go on the other side of the trend line. And so that on the whole, you know, basically argues for slow growth on the inflation side. You know, I would argue, you know, this summer, yes it is important,

but remember that inflation, you know, generally lacks. So this problem is not going away. I mean, if you look at historically how inflations behaved relative to you know what people talk unemployment, the output gap, it's next year that's going to be the problem. The great missed call of the decade or two decades has been the certitude of single digit equity returns wrong, wrong, wrong, wrong sp X six per year for the last ten years. I think,

are we going back to a single digit structure? I mean everyone's predicted it, yet you and the other optimists have said, no, you gotta play, you gotta be in the game. So so you know, I would keep in mind that total returns us in people. I heard it last hundred a years since you did bring it up. It's about eleven percent. It's a very very clear trend channel.

And the gloom crew is saying it's single digit. Yeah, So I would say, given what's happened last year and this year, you know, I mean, we have brought forward some of that return, so single digits you know, next few years is not unreasonable. Thank you Channing in the studio from Deutsche Bank, the chief global strategist and it had joined us. Now equate her pants on one leg a tak you want to go there, right down, Anna, I'm going to keep things down a minute with markets.

Let's get to the equity market. And there is anything about your rout look shifted in the last week. There has been some shifts, especially in the last week. What you did see is that more people on the FED are expecting a little bit of a sooner rate hike. But you know, that move, as much as it was a bit surprising, wasn't all that um mind blowing you saw go from to maybe a hike at two That probability distribution has been pulled forward in a time frame.

But that's not the biggest move to us. I think more surprising in the market was hearing taper talk start. But you know when is tapering actually gonna begin? We don't think that's going to happen until the end of this year. And your note is brilliant. The way your dovetail g d P and is great. I've been I've been harpered on this for a week and a half. I'm putting my pants on one leg at a time, and I want you to tell me right now what your own power putting his pants on one leg at

a time. What we do with eleven point three percent nominal GDP your new statistic up seven point three percent plus four percent inflation. I think that math is eleven point three percent, and that's a boom economy. Stocks go up. Yeah, when you looked historically, you know, equities can go higher even as rates are moving higher. Uh, And that's because it's the level at which they're coming off of. Where we're lifting off of mind, you look at where the

tenure is. But with these kind of changes to our projection, the big driver there is going to be consumer expenditure. What maybe a risk to our outlook we're keeping a very close eye on, especially with upcoming earnings, is going to be how the supply chain and inventories hold up. Anna, you talked about the surprise of potential tapering. What would the implication be, what's the reaction of equities should the

Feds start to taper their bond purchases sooner? Well, you know, they're buying a hundred twenty billion dollars a day, and I think rather than being a crutch at this point, it's just something like we've gotten so used to it, we've come dependent on it. Having that liquidity. As they taper that back, I think that risk appetite will be part back a bit. And that's natural when you have accommodation coming off the table. People are going to have to adjust their risk outlook and see what kind of

cyclical exposure they want. But that doesn't mean necessarily it's time to head for defensives. In fact, the macro theme and play still remains reflation recovery here. It's just a bit of a little shift and it's different mentality than we saw from a year ago. So if you had to won one sector into year end and it would be financials or would it be big tech, I would go with financials. You know, the millennial in me still

believes that tech has more upside to go. But you know, the out performer here, especially in the back of of this year, of the next six months, I put my money on banks and financials. How much is this a bit on a stepening yield curve? You know that steepening yield curve has been uh, you know, it's been a headwind for banks and financials in the last quarter. You saw what happens when the bat came down. You saw

what happened last week when that yeeld curve has been flattening. Uh, and it can be a challenge, but I think that's something that the market is going to get through. I think that something that's going to see that trend returned to a Stephenie yield curve, especially as you see more data come out. But one of the things we got to watch out for as well is you know, how long is that inflation going to be marred or when

can it continue? Can the supply chain really slow it down and keep that suppressed for the next several months. I think that's going to be a part of the market. We look as a signal for that, and I always great thank you and hand that at last. 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 In. This is Bloomberg