Surveillance: The Fed Is Probably Not Done Hiking, Dudley Says

and listeners on Bloomberg Television and radio worldwide. We're joined by William Dudley. He's the former president, of course of the New York Federal Reserve, now in semi retirement as senior scholar at Princeton University for the time being. Till you, uh, until you come up with something more interesting to do. There is press. It's plenty interesting. Well, you're keeping up,

I know, with everything that has been going on. One of the questions that comes up here as people look forward to what monetary policy is going to be the rest of the years, where is neutral Because the Feds seemed to think it was another fifty basis points are so higher, but now we've got to pause, so maybe it's come down a little. Maybe we're right at neutrals. Where do you think we are like, I don't think that anybody knows was any certainty. I mean, this has

been an unusual business cycle. Think about how long it's taken us to get back to full employment. I think generally what the FED is saying that in the language of being patient is that they're going to take a pause and wait for more data. I think there are a number of things that push them off moving to more tightening moves. Number one, you had a tightening of financial conditions. Stock prices went down, credit spreads widened, so

that was one concern. Second, foreign growth looked a lot weaker, especially in China and Europe. Number three, there wasn't any inflation. You know, the inflation was the story of the dog that did embark. Even though the unemployee rate was low, you weren't seeing any acceleration much of much of an acceleration in wages, and that wasn't feeding into prices. My own personal view is that as long as inflation stays coiescent,

FED will probably be on hold. If though the economy keeps growing at above trem pace, more pressure on resources, inflation probably will start to drift back up again. So my best judgment is the Fed's probably not done yet. Well how far did they go? Uh, at what point do you risk an accident? Well, that's why I think they're being patient right now. They don't want to call inadvertently cause a recession with inflation this law because people say, well,

what you do that for? If inflation actually were to accelerate a bit, then they at least have a motivation for why they're moving to a tighter monetary policy stance. Well, once you did that for was to prevent downturn in the economy, which this group here, according to a survey of NAB members, suggests may come in two thousand twenty or two thousand twenty one. But the FED doesn't have

a lot of ammunition if there's point to fight it. Well, that's one concern that the FED is wrestling with is if the peak federal funds rate in the cycle is you know, two and a half three, three and a half percent, there's not that much room between that and zero, and so there's been a lot of discussion among FED officials and other market observers on does the FED have enough firepower to get us out of the next economic downturn.

My own view is I think there's more firepower than people realize, because they FED has invented a whole bunch of new tools to use if they're ever at the zero or body again for guidance asset purchases, open ended asset purchases, We'll just keep buying assets until we actually achieve our objection objectives of an actual recovery. But one of the arguments there is that a lot of that success that the FED had with those tools came from the announcement value. Now people know the tools are there,

so they may not have as much of effect. Well, I think that if you let's imagine that we were in an economic downturn and the FED had reduced interest rates to zero, if the FED announced that we're going to do by treasuries an agency mortgage backed securities until we achieve us a given unemployment rate objective, that would be also a good commitment strategy. Would make people realize that rates are going to stay low for a long time until the FED actually has success. That's actually quite

powerful in terms of supporting economic activity. Has the fact gotten too intertwined with the markets. Now, one of the reasons that the Fed, as you just said, when on hold is the market problems and dislocations we saw in December. And now everybody's back to the Powell put, Well, can

you disentangle yourse? Well, it's tricky, right, because the Fed doesn't care about the stock market for the stock market's sake, cares about the stock market because of the stock market wad to go to down a lot and stay down, it would have consequences for the economy. So there isn't a put in the sense that the Fed is trying to support the stock market at given level, But there is a point in the sense that the stock market gets very weak that has consequences for the outlook and

therefore for monetary policy. Well, they also were worried about the balance sheet. The balance sheet was supposed to be watching paint dry. Did Wall Street get that wrong? Well, I think all that happened there with the FED decided that the banks have a greater demand for reserves, and the FED had thought so. That just means that the stopping point for when you stop shrinking the ballantree is a little bit earlier in time than what they anticipated.

It's not a big policy adjustment. They never knew how many banks, how many reserves banks we're going to demand, and now they're finding out the banks look like they are going to be in a little bit more reserves than they thought. That just means the stopping point is gonna be a little bit sooner, But it doesn't have a huge consequences for does QT though, have the same effect on the downside that it had. It doesn't seem

to be having the same effect at this point. Part of the reason, I think is that people still are worried about inflation being too low rather than inflation being too high. So if you look at what what what the market participants called bond term pre and the spread between bonds and the spected path of short term rates, that's very very tiny. That's quite different than in past

economic cycles. And let me ask you about a point that both the Chairman Powell and Vice Chairman Clarative made in the last couple of days, and that is that the federal deficit is just way too high and it's going to have an impact on the country. And yet we've talked about that for decades and bond rates are

not going up. Well, I think it's partly because you have to look at the US bond rates in the context of rates elsewhere in the world, and we have very very low rates in Europe and Japan, so that's obviously a factor. And two people, Yeah, I think you're absolutely right. People anxiety about budget devis has going down

a lot, but I'm sorry where they are. The budget devs is not only going to keep increasing, the debt service costs is going to start to climb very very rapidly, because not only is debt growing, interest rates are higher than they've been over the last ten years. So I think that that it is going to be a problem.

It's not a problem right now. Well, what do you think of the modern monetary theory mm T argument that is getting so much attraction these days, particularly up on Capel Hill lately, that if you print money in your own currency you don't have to worry about deficits for a while. At least, I know it's the squishy definition. I think they're overstanding that it's true that if you print currency, print issue debt in your own currency, you don't have to default, so there's no default risk, but

they're definitely an inflation risk. If you have too much money through chasing too few goods and services, you're gonna get inflation and that would be the consequence. So there, you know, as in economics, there is no free lunch, So this modern monetary theory I'm not buying a lot of Last question on the inflation and that is where do you think it goes from here? It disappeared in

the fourth quarter. Does it start to come back? Well, I think it'll probably come back a little bit because obviously oil prices have recovered, so that's something that you know, moves in and out pretty quickly into the inflation numbers. I think underneath the service you're seeing a very gradual firming of inflation, driven really by the tightness of the labor market and the firmness that was finally seeing in

wages enough for the FED to have to react. Well, we'll see it's gonna you know, all this stuff is slow moving, so we'll see. I don't think the Fed is gonna do anything in the near term. Second half of the year, maybe FED starts hiking rates again. Bill Dudley, thank you very much for joining us this morning. Bloomberg Television and Radio worldwide. We'll send it back to you. Oh, Michael McKee, thank you so much. For the former president of the New York Fellow Reserved ACAS, Bill Dudley at

Goldman Saxon. I should say he wrote with Ed mcclvie a wonderful chapter in my book. This was Mike John Farrell. This was forty five years ago. This was after, you know, just sort of early Thatcher when that book came out. One of the stories off the mark today Brexit. There's really not much there. You're a sterling. Rather one thirty three is weaker one? Two thirty nine right now? And yeah wow, would a move on five? John? I missed that Japanese Yeah, weaker one. I just flat out and

missed that. It was yields right, US. Yields are right up against resistance. Had a bit of a drift free this week, a bit of a drift. Why don't you bring our wonderful guests in on the yields. I'm very happy to catch up with pre Misery till Security's head of Global interest rates Strategy. One of my guiding lights for the bond market, the real yields. Look for it this afternoon. Great summer there on Bloomberg. Thank you Tom,

and thank you Prere. Let's start Prere with the range that we've been in for treasuries, a very tight range. We're actually still in it, but this week we've started to drift higher. Your thoughts, Hi, Johan uh and I Toma, thanks for having me on. So yes, I think we have drifted a little bit higher. Um. I think what's been interesting is over the last couple of months we've had a significant risk on move and yet interest rates have stayed in this extremely narrow range like two sixty

to seventy. We've been, you know, very tightly bound there, and I think it's it's a function of the macro market sort of move from a policy mistake or a FED policy mistake perception in the fourth quarter to now de wish fed um and and which is why even though equities were able to rally, uh, you know, credit spreads compressed interestrates were unable to sell off because essentially

the market raced in the stubbish FED. I think now going forward it has to come back to fundamentals, and that's where we might have more of a moving interest

rates rather than uh than risk asset. So if we start seeing the first look of February data in the US and we start seeing that actually growth is not decelerating, we're still growing above potential, I think we should be, uh, you know, back to talking about FED hikes and then on the global growth front um, you know, if we do get a China trade deal, if we do see China stimulus, I think we're then talking about a little

bit of an upside moving rates. So we are we are actually short duration here, looking for a small increase in rates, you know, closest level at the moment. I think most people would conclude it's far too premature to call the turn in the global economy with any real conviction. But how encouraged are you by some of the data points this week when the headline data has been terrifically underwhelming.

But we're just clinging to these little elements, these little components of p M I that show a bit of encouragement right now, that's fair. I think it's it is too early to say whether it's we're actually turning. I think we're looking for momentum, though, is the momentum decelerating? And I think the early read is that maybe the momentum is stabilizing, and we're also looking at policymakers globally that seem to have changed their stands for normalization, tightening

to now, you know, being accommodative. What are people doing with their money? It's tough. I mean I think, um, you know, they're staying in cash. Cash is king in the US front end. Cash is giving you positive real rates. So I think you keep risk light. Um, you know, you certainly have some cash for liquidity reasons, and then you start dipping back into risks. And this is where I think it's hard to say that you should just

be buying all risk asses. You start doing more credit work, and you you pick you know, sectors or issues that or other issuers that that still may look fundamentally strong. But it's a tough market. I'm hearing this from every investor I meet. The tight range in the fact that risk is valid, I think, you know, means that it's it's hard to work now putting money to work. This

is fascinating. And someone that would agree with pre a miserable TV securities is Daniel Fuss, who was just on Bloomberg Television, the acclaimed really the giant of total return investing. Bill Gross has always said that Mr Fuss at Lomas Sales was out front on this. Can you exist now after the last ten years we've experienced investing like Mr Fuss or you grabbed the coupon and wait for credit recovery and price appreciation of a note or bond. Is

that game still out there? Or all the young turks like you become so sophisticated you can't do what Damn Fuss did. Um. I appreciate you calling me young, so we but we won't talk about that. UM. But I do think there's you know, that trade still exists. The very trade is there. You look at demographics in the U S so globally, I think demand for fixed income should be there. Now you have to diversify your portfolio. I think the difference in what I was recommending, you know,

ten years ago, was to be out the curve. I don't think you're getting paid up that much more to interociation risk, so I think the front end actually is more attractive. I would mention John that Mr First, the history of like buying all of Ontario's utility bands or buying all of New Zealand's paper huge bets fast and i'd continue with pretty much. So I pray something you

touched on earlier that I think it's quite interesting. A lot of people have been quite bearish the global economy and encouraged to take on juration pick up at the long end of say the treasury curve. What I hear from you is not that creer. Why is your view so different? I think you know, if you look at a risk adjusted return, you're taking on a lot more

risk and not really earning that much more. I mean, if I look at the two year at two fifty versus the ten year at two seven, if you have any interest rate increase, you're much more at risk the further out the curve you are. So I would say, you know, if you have some risk assets on on the front and own bills or twos, rather than you know, taking on all that duration risk for not earning that much more. Let me speak for our audience. That's all great,

and it sounds brilliant, except I need yield. If I need yield, where do I get it? So I think credit, there are there are pockets of credit where I think, you know, you can dip your toes back in um and you know, take some credit, take on some front end duration, keep risk light because I think, um, you know, this is an environment where we're going to get these stale events. I mean just look at the fourth quarter, and you know that's when if you have some powder dry,

you can go back and invest. The moment that some you know risk off, that's the time to you know, go back in. It's hard to say you should be hundred percent invested right now, just given that all risk premiums have compressed. So I think keep some keep some powder dry, and invest in some mix within the fixed in compole that I that I look at credit versus some front end bills, I think it's attractive. John Farrell, John Herman just publishes at m U f J. I'd

love to have pre a comment on this. Mr Herman pre n notices a little bit of inflation stickiness within his micro analysis. Do you agree? Do you see inflations stickiness out there that bears a close watch through March and particularly to the March twenty meeting. Um, you know, by stickiness you mean in the fundamental data or the market price, the fundamental data leading to a misjudgment by

the disinflation crew. As John Farrell mentioned, early in the segment, right, So I think, yes, there's even the data suggests that there's significant inflation in Ussia. And we're in an environment where none of these models have done a great job predicting inflation, and so are we at some inflection point where there's going to be a big pick up an inflation.

I think the market has sort of is in the show me mode, and so unless we start seeing that pick up an inflation, I don't know if the market is going to say or or that even the Fed seems to be losing a little bit of faith in this big pick up inflation. So I would have to agree, yes, there is just wonderful premise that we're going to thank

you for their TV security is just wonderful perfect. I mean, you know, it's Friday, we're looking at the themes that matter from Seattleton, New York, which can only mean Amazon, and you know the quality of the guests we have, you know, John, in America, I don't know about in England, you have to take Western of one oh one when you go to school if you go to that common institution, have a for down in Pennsylvania that com wired requirement you need to take socialism one oh one, just to

get in the door from Haverford. Sure overdate joins us. What is it like freshman year at Haverford. I do not remember any communist propaganda. Oh, freshman year of courses. If that's the question. It's a great school. It's a fabulous Quaker institution and wildly eclectic. But it's great preparation for the Battle of Queens, which is the class, cultural and political battle. Let's just frame it between the gentlewoman

from the Bronx and the governor in Albany. Give us an update, I'm Bezos and Queens given the cultural battle of the New York Times this morning. Yeah, well, the New York Times is reporting that Andrew Cuomos, the governor of the state of New York, has basically made overtures to Amazon executives, including Jeff Bezos himself, to get Amazon to reconsider their decision to pull back from this HQ two or whatever HQ one and a half that Amazon

was opiniata a second time. That's what's gonna happen. Yeah, I mean, it does seem, at least from the reporting, that the conversation is rather one sided. It's basically Quomo making assurances that if Amazon reconsiders that, Cuomo will sort of shepherd the political, the messy political process himself, and take some more responsibility over that. Sure, I make jokes about it. You are wired into this store like no

one can that happen. Can the governor in Albany tell the state senator what to do and and the others that have driven forward this exit of plans? I don't think so. So. The the issue here is that both Amazon and local political leaders, including Cuomo and mayor build

the Blasio, they botched this right. It was this complicated, secretive process for for a year, highly public and secretive, kind of a toxic mix involving one of the world's most valuable come bunize, and I think it just left a bitter taste in everyone's mouth, including local politicians, local residents, Amazon executives. And it doesn't seem like there's a do over.

And it's very public this morning once again with this big letter in the New York Times, dear Mr Bezos, please come back, essentially share My issue is this whole HQ, as you put at one point five, Why did they do this both so publicly and then so privately to get the states to fight with each other, as you say,

it's toxic. Why didn't they just do what Google are doing in Manhattan, pick somewhere by it invest Yeah, I I I wonder I hope that Amazon learned their lesson from this process that they basically set up a reality television competition saying, please all US cities, all North American cities come and um, you know, lay flowers at our feet and tell us why your city should be graced

with Amazon's presence. And that might have been a good idea in late when Amazon kicked off that process, but it just kind of got more and more distasteful as the process went on. And also, look Amazon, the story of Amazon also got a little bit more complicated in in that year that the process took Amazon became more valuable,

more powerful, Bezos became the world's richest person. And then when they kind of decided, oh, we're not going to make an HQ two, We're going to make two or three HQ two's, I think it just it just seemed a little gross. So share going forward. I mean, so much work has been done here in New York City to attract tech firms, some tremendous work has been done and you can see the results. Does this episode spill over into anything more broadly or is it just an Amazon,

uniquely Amazon episode. I think it's mostly a uniquely Amazon episode. The reason that the tech community, that the tech hiring has flourished in New York City is not necessarily about you know, tax breaks and showy political press conferences. It's because this city has a lot to offer the tech industry, including highly talented people in good infrastructure. At least in theory, this is a place that a lot of people still want to live and that isn't changing just because Amazon

kind of got its fingers burned on the stove. Share I get to see you, You've got to come back happy. I was happy to be here overday Bloomberg opinion columnist and Tom Kine with quite an introduction that it's it's true. I mean, I'm jealous. I wish can I go to Haverford Domains of knowledge, analysis of the social world, individuals, institutions, and cultures. You're trying to say that communist. She is

not comic meaning interpretation. Have you read anything but I've taken analytical geometry and shar is diving into meaning in terms I think. I think that I don't know. It's analytical geometry. Really I'm the one that geometry. And but you know it's great good morning down in Philadelphia and Hamford. Would you think the Phillies picked up a good player there. I'm excited about Bryce Bryce Harbor in Philadelphia. See that she could do it all. Share overthing on Amazon, on socialism,

on Bryce Harper mint. This is a joy. We're scheduled here to talk to Eric Shatzker about one William Gross. You'll recall that Mr Gross move bonds, made coupon did a total return act of PIMCO, went to Janice. He decided to retire a couple of weeks ago. We chatted him up then and this is a really important conversation. But before we get to that, we gotta do what's important. That we have Eric Shatzker in the studio who believes Toronto maple lice blue. For those of you globally, here's

you need to know. The giant of the New York Islanders just east of Manhattan, left the Islanders and joined up with the excitement of the iconic Toronto maple leaves, and for the first time last night, I went home. You happen to be wearing Islanders blue and orange today. But he has met John tavarrus is Phill emails in and says is a total class act in the game of hockey. What does tavirus meant for the Maple Leafs and all those young kids that they have? Oh wow,

that's an interesting point place for us to start the conversation. Look, he's got experience. He's this is gonna sound like locker room talk. He's got to do that all day here. He's got experience. Obviously he has faced adversity like last night. Yes, yes, fair enough, fair enough, But it's a young team. So a guy with not just his skill set but his disposition, his humility is going to help those young kids play hockey.

And there's the difference that you grew up with that I had, folks when I was I mean little, a sweater hockey jersey used to be sweaters and I had a Toronto Maple Leaves blue sweater. And there's something magical about the leafs. What do the original what do the leafs mean for Canada? Everything? I mean that on Montreal right, well sure not Montreal is look the the the rub if you will about Montreal is that it's in Quebec, and teams in Quebec just don't inspire the rest of

the country the way, very nice team. You could be running for Mr Trudeau slot. Oh and and there may be somebody else running for that slot in the not too distant future. That's the issue, right If the Leafs end up winning the cup, the whole country celebration sat with us. This conversation with Bill Gross was important. Why was it important? Well, it was an opportunity to ask Bill Gross, as he has one foot out the door.

Today is his last day at Janie Henderson, the end of an unbelievable forty eight your career, Uh what we don't yet know? And you talked to him a couple of weeks ago the day he announced his retirement. I went out there to see what was still left to learn from Bill Gross and to ask the kinds of questions that we may not have asked yet. We have all read about the trials of his nasty divorce, right it was tabloid fodder thousands of miles away here in

New York City. And so one of the questions I asked Bill was you know to what degree if any did that distract you, because it's the burden is heavy to manage hundreds of millions of dollars of client money, not to mention hundreds of millions of dollars of your own money when you're going through that kind of thing. And here is what Bill Gross had to say in response, It was really surprising my personality, um, not to get personal.

I'm an Asperger, uh, and Aspergers can compartmentalize, they can operate um in in different universes with the other universes affecting them as much. And so, yeah, I had a nasty divorce and uh, I still had you know, feelings about temko um, but I think he did pretty well um and compartmentalize them. Not that I didn't wake up in the middle of night and start damning one side or the other. But but when I came to work, it was all business and I don't think it affected

me is that much. But you know, it's hard to know you are not your best witness when it comes to trying to figure out whether something is affecting you or not. And so that's a possibility. I didn't know

you have Asperger's. Is that what you meant in February of two thousand sixteen, in one of your outlooks, you wrote about Michael Lewis's book and the movie it spawned The Big Short, and you said that you shared an attribute or an affliction I think, with one of the heroes, if you will, of that book, Michael Berry, Dr. Michael Burry. And it wasn't his glass eye exactly. Um, if you got a minute and a half is a fascinating story.

And so I read that book and and Lewis is a great writer, and he within that chapter about Michael Berry, he listed ten things um that Asperger's have, um, that Michael had as well. And I read them and I go and some of them were not being able to look somebody in the eye, which I'm not doing very well well at the moment. Um. Uh, you know, singular hobbies like stamp collecting, Etcetera's under etcetera. Um, And I go, alright, that's me, I go. Um. And so I took the

book out to my ex wife. I said, um, I read this, and she read it. I think Asperger's and she said you do not not you do? But she said you do. I said, how would you know that? She said, well, you know when we were having dinner with Bill Gates and Melinda, and that was like five years before, at a Duke reunion fundraiser at his home. She said, we were sitting at the table and I looked at Gates and I looked at you. And I

looked at Gates and I looked at you. I said, you were doing exactly the same thing at the same time. Her mannerisms are all the same. And so I had heard that he had Asperger's in a mild for him. So I went to a psychologist and I described it and the psychologist said, he has Asperger's. So I said, Uh, why didn't you tell me? And she said, because I thought it might hurt your feelings. Ah, you didn't know this about yourself. M hm. So I read it in

a book, Um, until you were in your early seventies. Yeah, but it explained a lot. Not not that I'm I'm sort of proud of it, or else I wouldn't be telling you. Um, I'm sort of proud of it because it explains a lot about me. Not that you know, all Aspergers are not geniuses. You know, the intelligence thing is not necessarily a big part of it. But you know, my personal behavior and ability to relate to people. My

singular hobbies stand collecting this and this and this and this. UM. Yeah, I said, hey, uh, and so maybe I do UM. And so I did go to a psychiatrist. And on the first meeting, at the end of it, I just through it. I said, do you think I have Aspergers? And she said, oh yeah. Imagine finding out seven decades into your life, a rich life and exciting life, a life of extraordinary achievement, but a complex life that some of it maybe explained by what is termed, if if

not fairly, a disorder. And and you heard him say it there. He says, it explains a lot. One of the great things I've seen Eric over the years is people that struggle with total return and they get moved out of institutions for whatever reason. There's a guy named Jeffrey Vinnick who happens to run the most successful franchise in hockey now that down in Tampa Bay, who's an absolute textbook example. Weeks or months or quarters later, whatever

their theory was or bet pays off in spades. Is does Bill have any feeling of he's leaving the game now and that it could all turn around in a Bill gross manner. Yeah, he does. He thinks that his trades are still good, but it's going to take too long for them to be money good. And and that's the issue. He said, he needs to give his clients a break. They've been hanging on for too long. He's going to continue managing his own money. He's going to

do it more conservatively. He's going to continue selling volatility, which he acknowledges may now and then look like a mistake. But he's going to be investing in closed and funds. He's going to be investing in muni's for example. Um, he's not going to be uh making levered bets on the convergence of you know, German buns and U S treasuries.

You've been done two things today successfully. You're wonderful interview with Mr Gross And also four twenty two New York Rangers fans have emailed in on your leafs Islanders and it's all about conversion, we said, Jonathan, good morning out there. And then many other Ranger fansitive looking for their tavirus if you will, Eric Shaftsker, and look for that tonight on Bloomberg Television nine pm and much through the weekend, as well as Shaftsker in conversation with Close. 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 Winter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.