Surveillance: The Future of the Fed

The President of the United States to nominate Chairman Powe to a second term as FED Chair, to nominate Governor Brainerd as FED Vice chair. That news coming from the White House in the last few seconds. That news this morning, the President of the United States to nominate Chairman Power to a second term as the FED Chair. From New York City alongside Tom Keene, Lisa Brown It's son Jonathan Faroll.

Your reconly market at four tents of one percent. Tom Keane the chairman getting a second term, least he's been nominated for one. This one goes to the hearings. The market looks like it likes it, up fifteen and futures now up twenty. John still moving higher in the yield was from a one fifty six and change after one zero five at Lisa, it's a split, the president nominating chairman power to a second term Brainard governor Brainard nominated

as FED Vice chair. Yeah. The idea here going with the status quo in the sense of trying to have continuity. One of the most perilous times, some people would say for FED policy possibly in history, based on how low rates are and how high inflation is. This is about two things, Tom Kane, continuity one and confirm ability too.

We can talk about continuity at an important inflection point for monetery policy, we need to talk about confirm ability as well, perhaps that shaping the decision down in Washington. Sco point John here, and we're gonna have a wonderful set of guests. S are we welcome all of you on Bloomberg Radio and Bloomberg Television the special Hour of Bloomberg Surveillance. What Michael McKee and I know there's been other times where we've had to reappoint ointments, maybe without

that focus. I went back and looked at Bush Greenspan the fourth or fifth time, and it wasn't really that big a deal. Why is this a big deal, Michael McKee at this time. Well, we've gone into a different kind of world tom in terms of monetary policy, things that Alan Greenspan never had to contend with, never had to consider, with the quantitative easing, with quantitative UH tightening, with all the things that the FED has done to

expand its balance sheet, the zero bound UH. There's a lot going on for the FED, and it has become front and center in the United States, and as people have decided, the Federal Reserve is the economic savior for the country also the economic whipping boy. J Paal gets to play both roles in this case. Let's talk about this bond market move as will guys up five basis points on a two year up about four basis points on tens, one fifty nine on tents. Right now, what's

about fifty six basis points on twos? Mike, we can talk about confirmability in a moment. I want to talk about continuity and for this Federal Reserve chair staring down some data that is incompatible with an argument he's made through much of this year, and his vice chair, Rich Clarada now said to be replaced Governor Waller, both of them making a move in the last week to talk

about accelerating the taper. When we think about the first job of this chairman before we even see if he gets confirmed for a second term, walk me through the complexities of that for the next couple of months. Well, when the FED announced that it was going to start tapering, it said it would have fifteen billion dollar a month taper for November and December, but did not put any numbers on January going forward, leaving themselves some room to

try to uh, to have the ability to change. And it does look like they're getting set for a change now as we're hearing from more and more members of

the FED. Rich Clarida will be on the board for the December fifteen meeting, and so we could expect the Fed maybe to start raising, maybe raise the amount that it cuts the buying by on and that then would be a reason you would see maybe the markets moving a little bit because they figured that j. Powell is going to be much more on board than that than

necessarily Lele Brainard would have been. One of the conundrums heading into next year is the dual mandate, the idea of trying to combat runaway inflation or even higher inflation than they'd like. While allowing employment to get to a fuller picture. What happens if you have one, say hi inflation without the other, and how does the distinction of a power versus a brainerd FED weigh in on this. Well, what the Fed has said is they will look at both of the mandates and they will basically do risk

management on whichever one seems to be the worst. Their focus is on trying to get unemployment down. But if inflation starts to become more of a hazard and unemployment doesn't look like it's going to immediately drop, then they would attack unemployment. They're hoping in this case that unemployment is to use the t word transitory, it will take longer to disappear uh inflation, but it will start to fall back. And that's the general consensus on Wall Street

as well. In that case, they don't have to make a decision between the two, but tapering faster gets them to the point where they can raise rates if they need to more quickly. If you are just tuning in from audience worldwide on TV and radio, the President of the United States nominating Chairman Power to a second term as the FED Chair, nominating Governor Brain It's FED Vice chair this all according to the White House. In the last couple of moments, let's get some market reaction for

you from Kathy Jimes of Schwabs. She joins, does Kathy grant to catch up with you? Your first reaction please? Um? I think this is a don't rock the boat move. Um. It's it's consistent with you know, the long history at the FED. Usually FED chairs are renominated, and it looks like probably there was a thought at the White House that this fighting, a battle perhaps over brainard, was not worth not worth the fight worth having at this stage

of the game. Kathy, let's talk about the move in this bond market and you'll four basis points pushing one sixty again. The more interesting move for me is pushing sixty basis points at the front end on two's up by five basis points to fifty six early days kneez joke reaction maybe, But Kathy, what's your initial response to seeing that kind of move off the back of this decision. Yeah, clearly the market is looking at the likelihood that the Fed will increase the rate of tapering and move up

the timing of the first rate hike. Now that Powell has been renominated and you've kind of cleared the decks in terms of of policy, you know, decision making going forward. And I think that that's a reasonable expectation given some of the comments that we've heard from various officials and the fact that inflation has been higher and more persistent than expected. You know, the fab really shouldn't have any reason to be buying bonds at this stage of the game.

It's not really contributing much and it could be doing some harm. So the faster they taper, the better news it is in terms of getting the inflation picture under control. Kathy Jones was u here right now and own blinder scheduled to be with us here in moments. Cathy, I look at the bond market, I look at all the uncertainties forward in what we see, without question is a wall of savings, of liquidity, A buoyant holiday season for the consumer. Is well, what does the Schwab call on

the American consumer next year? The chairman Powell and vice chairman Brainer will confront. Now, we're pretty optimistic about the consumer. You know, there's high levels of savings, job market is is very strong, wages are rising, particularly for lower income workers. All those are really positive for the consumer. Obviously, it's going to be a something of a constraint of energy prices stay high, because that's a particular pain point for consumers.

But by and large, consumers are in good shape, so we're looking for that to continue to drive the economy going forward. Cathy, stay close for the market action. You're two year yield this morning up by five basis points. When I head down to d C and catch up with Blimpox Emory A Donna Washington correspondent, Amory, this is also about confirm ability. Can these decisions actually be realized? Take a listen to that famous quote from Senator Warren in the last couple of months on what she thinks

of this chairman. I can't support J. Powell for renomination. So my view is he ends his term, we put somebody else in place, and I think the fit is going to be better off, and I think our economy is going to be safer. Senator Warren. Emory called him a dangerous man, this president going against the wishes of some of these Democrats. Can you walk me through, just set the stage frame it for us what the next

couple of months could look like trying to make this happen. Well, the progressives are certainly waking up, probably unhappy with this decision, like Senator Warren who did call J. Powell dangerous man. But also on Friday, Senator white House coming up with a statement as well they wanted a new pick at the top. But Jonathan, as you say, this is about being able to get through that Senate. Come for me.

J Powell was confirmed eighty four to thirteen, and many of those people are still in the Senate that are going to be able to push forward. He has bipartisan support. Many credit him to being able to bring the U. S economy um out of the pandemic. And then you look at Brainarden. She received sixty one to thirty one. So you'd already see from their previous nominations and Senate confirmations that Governor Chair Powell had a much easier time

in the Senate. So that's potentially part of the decision making. Also, he was able to remain with going with Chair Powell. He was able to have this continuity at the top of the Fed where his predecessor Trump decided to get rid of Janet Yellen and elevate Powell. Now, this is something that he likely is going to toot that he wanted to make sure that the FED remains independent. At the same time, he's giving a nod to the progressives by making sure Governor Brainard gets a top spot, and

she is yeah. But in Marie d we have a sense of what the main hang up President Biden had with just renominating J. Powell, say a month or two ago. It's unclear, but potentially part of it is the fact that there's not just these positions. They have a number of other positions as well at the FED. So they're probably likely looking at how they would we work the FED to make it more diverse, to look a little

bit more like America. That is something you've heard time and time again Democrats campaigned for, so potentially that was part of it. And then when you had these two top selections Brainard and Powell, then you started to hear and are reporting that you had senators wanting to sit down with each of them. And this is where the counting game probably came in for the White House to

make sure that these two individuals can be confirmed. Emory down and Dasy a Wahington correspondent sticking with us through this morning on the back of this news, Tom Kane, let's build on the price section up at the front end, yield to Hime by five basis points. Clear read for the FX market, t K that dollar stronger, Well, the dollar stronger, and I think that's an immovable force here into the new year. John. I think you know everybody's doing the looks in that and know I'll readapt and

adjust off of this. And there's this the confirmation process, and that John, the dollars, the global system. And it is a vote today for what President Biden did a nanty six handle on the d x Y the Bloomberg Dollar Index, Lisa, a broader read of that U S dollar. More broadly, it's stronger. The idea that if they raised reads that will end up leading to a money flight

into the United States. I do wonder, though, is a chair by chair Powell excuse me, so much more hawkish than Leo Brainerd or is he going to have a rather dovish tilt as he tries to wait for the employment market to really pick up. Tom, As you think about the history of the Federal Reserve, I'm with Lisa. I just think on these two nominees, whether it would have been chairman Brainard or chairman Power for a second term.

How much daylight was there between the two. What I think this opens the door too, is a much cleaner conversation about what took place on Friday off the back of those discussions about accelerating the tape, and now we can have a real conversation, not about a lane up chairman in December, but a conversation Tom about pushing things is forward and maybe pushing things forward a little bit

more quickly. I think they will be data dependent, John, I I understand the parlor game of taper in rate rise and Matt Lozettie on with Deutsche Bank, and they're July ish. Now I should say on on some form of rate move. But John, to me, it's a boom American economy. Frankly, the comments of Dana Telsea on the American consumer are just as important as Matt l Zati of Deutsche Bank. So what extent though, Lisa, right now? Are they date to dependent? Are they going back to

being forecast dependent? Because everything I hear from them is about the future. In the future, this will happen if we were truly data dependent and we were looking at the data right now we'd be saying things are stickier, they're broader, and maybe we were really quite wrong about our forecast of what would happen with inflation through the year, and the employment market perhaps is a bit hotter than

we previously previously expected. You raise a really good point, John, the idea that FED Vice chair Rich Clarida basically talked Friday about accelerating the taper and we did not see any real material reaction in markets, and I was surprised by that. Today you raise the point people dismiss that

is not necessarily being as relevant with leadership. Well, now all of a sudden that has becomes a much more real conversation, doesn't it If you just chune again front audience worldwide on TV and radio, tell m Kane, we have a decision from the President of the United States to nominate Chairman pal to a second term as FED. Yet we all knew this was coming. They came to me a couple of weeks ago and they said, who

do you want to speak to? And I said, there's only one voice that matters, and that is Alan Blinder, Princeton University. In the former vice chair, Alan Blinder. It was a different time, a different place. You know more than anyone on the planet what it's like when a chairman and a vice chairman don't get along. You and Chairman Greenspan collegiately battled at your time at the FED. That's not the case. Now, How will this vice chair assist this chairman? Well, I think perfectly as she has

been as from her seat as governor. You know, it's the same table. She'll have a new title, a better, uh higher title. But on monetary policies, I think Johnathan said a few moments ago, there's been no distance between the two of them. This is pure either way. If Layle Brainer has become a chair, there'll be no discontinuity and monetary policy. And there certainly is not going to be any conflict on monetary policy between share Power and

Vice Chair Brainer. If there's any disagreement uh, and there probably will be, it'll be on regulatory uh policy. By the way, That's the way it was mostly between Greenspan and myself way back in each history. Explain now that the rules have changed on the linkage of a monetary and fiscal policy, what the voice will be for this new team is this nation tackles trillions of dollars of new debt. Well, you know, the Federal Reserve. This comes back to your taper a question that the three of

you were just talking about. The Federal Reserve have been buying quite a bit of the newly issued debt, which smooths the way obviously for issuance of large amounts of federal debt. That's going to continue, but at a diministrate and I actually joined, I'm part of the school of thought that says they ought to be tapering faster. But let's remember, tapering does not mean withdrawing. It just means easing off the gas pedal. Uh. And that's why I think it's an appropriate thing for the FED to be

doing uh right now. You know, there are these vaguest hints the Clarida discussion was just mentioned that the FED is thinking in that way also, we'll see, but I think they should and I don't see that coming back to your previous question as a point of contention between

Powell and Brainer at all. I just want to bring you some newsly, so just very quickly, one twenty Eastern time, we will hear from the President of Nada States Lay will also hear from the air and the Vice Chair, the nominations for both Chairman Powell and Governor Brain It also delivering remarks a little bit later. That's one twenty Eastern time, So we're here from all three perhaps a little bit later, and in the meantime, certain comments are

already rolling in from the leadership of the Senate. We do get us. Senator Shared Brown, chair of the Sudding Committee on Banking, Housing, and Urban Affairs, coming out and seeming to endorse FED Chair j Powell, saying that he led our economy through a historic pandemic and under his and President Biden's leadership, unemployment has fallen and workers are

seeing increased bargaining power. Alan, when we look forward, what is the biggest risk in your view for the Federal Reserve moving too quickly or waiting too long to raise rates. I think it's probably waiting too long, but I can understand the way I thought you were good leading up to a slighting through it question. I'm just gonna say,

I think the biggest risk that the FED. It's weighing on the FED right now is whether we're going to get on another wave of COVID infections coming over from Europe, as has happened several times in the past. If that happens, we're gonna get kicked down the staircase again, and we're gonna be looking at the first to help us get up. And I think that's the main reason why, uh, they're not anxious to lift off interest rates. That's slightly separate

question from the taper. The taper is pressing on the gas pedal out at a time when it's really not appropriate. The liftoff is when you start tapping the brakes uh a bit. They're not ready to do that, and I think this big risk of the disease is a major reason for that. Alan. Given what we've heard from Germany this morning and from Europe over the last couple of weeks, I think a lot of people might agree with you. Tom Let's just frame the president's next twenty four hours.

Just think about this. We're expecting some comments from the president tomorrow about lowering prices, and today he's going to stand alongside Chapel a governor Brainer to talk about what exactly the future stable prices, lower prices. You put those two to two events, togetha and something. They're pretty interested gotten. They got into the Thanksgiving holiday, Oh it's a dynamics.

It's just simply John the into the holidays. I'll take your point in this, John, but what I see here as all new inequality is is well, I mean, there's the halves and the have nots. There's a partition, John Farrell, within our society, and that's what they have to confront. Mike McKay once twenty Eastern time, we'll get some comments from the President of the United States on this, and we're here from Sham and Pound and Governor Bran. Mike, what are you looking for from those comments? A little

bit late to this afternoon. It's kind of interesting because the President has already scheduled a talk on the economy and inflation for tomorrow, so I'm not sure how much he wants to step on that, but apparently he does want to introduce his two new leaders for the FED, and we'll probably talk about inflation. That is the key element in the statement the White House put out, the President is quoted as saying that he ciates the focus of Chair Powell and Leo Brainerd on inflation and on jobs,

on full employment, putting inflation as his first priority. So one can assume he's going to try to deal with that both today and tomorrow. I wouldn't expect a whole lot from J. Powell and Leo Brainerd as nominees. You don't want to get out ahead of the Senate. You want to save anything that could end up being a controversial comment until then, Uh, they'll thank him and say there here to help the economy move forward. I see now Alan Blinder still where there's the former vice chairman

of the Federal Reserve and at Princeton Allen. There was a point long agoing far away where a Federal Reserve chairman was contained. Not only Chairman Paul, but others have changed that rule book for the time of green Span. Blinder is, well, how will the second term of power be different? How does he cast the day to day, the press conference to press conference differently? Reappointed, I think that's completely dependent on the state of the economy right now.

As several of you have just correctly said, inflation is popping up as the main problem facing the FED, which hasn't been true for years, like maybe maybe I should

say decades. I mean, it's been a long time since the FED chair or the f m S more broadly, is really concerned about high inflation, but now they are, and so I think for that reason alone, you'll see a different tone of rhetoric coming out over the coming months, and eventually everybody's guessing when a lift off on interest rates to try to slow things down a bit and counter the inflationary search. That guessing getting continues this morning with your two year, your five year, the yields on

both at the highs. From off the back of this decision, some comments from Secretary yelling the former Fed share of course, saying she's pleased with pal brain and nominations. It will can ten you to support a strong federal reserve. Kathy Jones a schwab stool with us. Kathy, thanks for staying patient at stand close. I want to bring him into the conversation again. We will hear it once went from all three, from the President, from the chair and from

the would be vice chair. Let's see how the nominations goes and how that works out down in d C. But when you hear from Governor Brandon the chairman Pound a little bit later, canthy just walk me through your thoughts on this what you're looking for specifically, after we just heard on Friday from Governor brainerd from Governor Waller rather and vice chair clarity that maybe we should think

about going quicker. Yeah. I think the emphasis, to the extent that they get into policy discussions at all, will be on the inflation problem that's currently front and center right now. We know that Powell has been pretty darvish, as has Brainard, but I think that because of the optics of this and inflation being the big concern for not only the FAT but for the administration, that that's where we're going to hear the probably the most interesting comments.

I don't know that the Paul's going to tip his hand and talk about timing of liftoff or changing and tapering or any of those details, but I think the emphasis will likely be on the FED is very much aware of the inflation threat in front of us and wants to balance that against allowing for a full recovery

in the economy. Cathy, how difficult will it be for FED Chair J Powell and Leo Brainard, the the announced potential vice chair, to come out and remain independent and portray a deeply independent streak as President Biden talks extensively about the need to control inflation. Yeah, I don't I don't see that as a huge problem. Um. You know, I think that people will read their comments the way

they want to read them, from a political perspective. But keep in mind Brainard has been at the FED for many, many years. Powell now has several years under his Belvist chair. Um. I think that they can point to their policy moves pre Biden administration as um as underscoring their independence, their ability to work through one administration and one political regime

or another. Kathy, what about the dual mandate here of inflation and full employment, which takes precedence as we head into next year, Given the fact that so much emphasis has been placed on Leo Brainard putting more of a focus unemployment than share Powell, Yeah, I would say. I would say Paul has also put a big focus on employment. He has been fully on board with the idea of

a broad and inclusive job market. Obviously, it's going to be a very, very difficult task because we're in a very unusual circumstance right now, with inflation popping up but still having you know, significant number of people not back at work and wages rising. But I think the shift now will be towards inflation and less so on the job market. Do a couple of things this morning. Work count the reaction in the price section in the markets, and then work out the reaction down and Washington d C.

The reaction in the markets is pretty clear. Yields up at the front end by six basis points. Now for a two year yield, a six basis point move, that's a pretty sizable move back towards fifty seven, approaching sixty as two year yield start to Winshire. You get some dollar strength coming through the Dollar INDEXX at ninety sixty two by four tents of one percent. That's a stronger dollar erectory market hanging in there, up seventeen points, advancing a third of one percent on the nastag of four

tents of one percent. So that's how we're set up in the price action in the markets. Off the back of this decision, here's a statement from the President of the United States. American needs steady, independent and effective leadership at the Federal Reserve. That's why I will nominate Jerome Power for a second chair second term as Chair of the Board of Governors of the Federal Reserve System and Dr Lele Brainerd to serve as Vice chair of the

Board of Governors. There is a ton of reaction in DC off the back of this, want to bring in a Washington corresponded down in Washington and Marie Hordern and Marie we talked about this now for weeks. A lot of people put our statements ahead of time, saying this is who I want to support, this is who I'm against. What for the reaction of the last twenty five minutes or side. Well, first, let's point to the reaction of

the Treasury Secretary Janet Yellen, a former chair herself. Remember in the summer she had said to the President, I think you should continue with the second term for FED Chair Powell, and she is right now congratulating them. She's also grateful, she says that the President nominated Dr Brainard to serve as vice chair, saying that she's a respected economist with years of experience and instrumental in the nation's recovery.

So Yellen has her pick. And I always thought it would be very interesting if the President was to go against his own Treasury pick in terms of who he's going to renominate. And then we heard from Shared Brown on the renomination of Powell for FED and it looks like what he is saying is that this is going

to be a pretty simple confirmation process. Remember, he is the first line of defense, and that hearing that's going to happen in order to get the president's picks through, and he's saying he's looking forward to working with both these individuals. And Marie, what do you make of the fact that independent was mentioned extensively by pretty much every recomment that's come out of the Biden administration and beyond. Basically, this is the takeaway at a time when inflation is

so much on the forefront of the political agenda. Yeah, two points. The first is gonna be on inflation. We have heard the president time and time again when he's touting his economic agenda. It's no longer about the social programs or the bridges. It is about the fact that his economic agenda is going to clamp down inflation. You look at the latest CBS poll when the s of Americans think the economy isn't doing well because of inflation.

So he wants to make sure that he is remaining at the middle of this recovery, that there is continuity at the FED and they're not going to be questioned about what happens with inflation, because he kept the same horse in the race too, so, so to speak, if he were to pick elevate brain Art and inflation does run extremely hot, potentially Biden down the road could have been um a bashed for that. The second thing, of course, is that his predecessor decided to take a different stand.

Since the fifties, for the most part, president it's continued regardless of whether or not his Republican or Democrat that was the chair. They continued with maintaining that continuity at

the Fed. And he's likely trying to point out that even though Jerome Powell is a known Republican, he has bipartisan support and that he wants to maintain that tradition when new presidents come in of keeping the FED chair at the top spot again though a not of progressives, because there is an elevation for Dr Brainard h Emory

Horder in Washington. We're going to continue here, Michael McKee with us of course, with all of his experience in international economics, Michael McKee, how will this be greeted abroad? There's such a set of different challenges for banks. Does the emerging market structure that is so challenged right now. Do they need a chairman Powell? I wouldn't put it as a needed chairman Powell, but it will help them

to have continuity because they know what to expect. Always better to know what you're dealing with instead of trying to figure out how somebody is going to behave going forward. And in this case, Um, the US dollar is going to a strong in the US is going to aid as strong as the economy. So emerging markets situation isn't gonna change. And John, this is critical inequities, in bonds, in commodities. Guess what the story this morning is the

dollar reaction? Yeah, if the back of this move at the front end, tell him, I just can't get away from it. Mike McKay, a six basis point move on a two year that's hard to ignore, approaches sixty basis points at about fifty seven. What you'll read on that, Mike, that lift at the front end, off the back of this decision eight minutes ago. Well, if I had an accurate read, I'd be a very wealthy man and I

wouldn't be here. But my guests, looking at what's happening and looking at the notes from people that Basically, it's sort of a relief trade of people who think that Powell is a little bit more hawkish than Brainerd and the continuity will keep the FED going. And with the talk of speeding up taper, all those things kind of combined into one and people who were holding back have now done a little bit of a trade. I'm wondering though, how long it lasts. It may be someone with knee jerk.

And remember, we get a whole bunch of data on Wednesday, ahead of the Thanksgiving holiday here in the United States, and I suspect that will have a very big impact on Yeah, hopefully I'll make that flight. Okay for anyone just tuning in, there is someone that is paid to do this far better than Mike McKee and I. It's Bob Michael, a JP Morgan Asset Management, the CEO of Global Fixed Income. Bob, let's just start with a move in the bond market off the back of this decision.

Yields up, yield high up. Your response to yeah, I think Mike McKee is right, this is a knee jerk reaction. Pals been reappointed. I think the market is is. Assuming we're on track for two rate hikes next year, but overall fairly moderate FED going forward. What's the biggest knee jerk reaction that you see as a miss pricing, Bob, the idea of a five year going out to nearly one point three percent, or the two year going out and rising six basis points. You know, Lisa, I don't

really think there is a miss pricing here. I think this is the central case that the markets expected, um that Pal would be reappointed, you would have Brainard as vice chair, You have a very devish package in there. I think what you have to look at our risk assets and that it is doing well. Equities obviously had

a nice bounce. You've got a FED in place for the next several years that's going to be very patient and finitive about normalizing at least as you get in the open and found equities are heading in direction happing for the you know, the reappointment equities are up. Equities are up full tents of one percent even with that movie lie. So in the bond market, in this prospect of time of monagy policy, that's exactly where wanted to go.

Bob is is basically giving a green light to the Federal Reserve to raise rates in the middle of next year and followed up with another rate hike just as the market seems to be pricing in well. I think there's a lot to go between where we are today and a year from now. I think certainly there hasn't been a tremendous amount of pushback on rate hike or

two next year. UM. I wouldn't be surprised if there was some sort of commitment from pal to the administration to be very cautious about the normalizing process and be sure that there are sufficient growth and inflationary pressure as we're seeing them now. Will that continue for an entire year? Sref they get through the tapering process and then start to raise rates. We think so, but let's wait and see.

Michael J. Pem We're going to arguably the essay of the weekend trying to game out our future on inflation and what it comes down to for our viewers and listeners. Is a tip point on the tenuere yield. Where in your head is the critical level of tenure yield where things change. I think north of two percent. I think there's a lot of UM clear space between here and

two percent. I think the debate as we go into will be how high can the FED get the at funds rate and then the yield curve will start to flatten out around there. Um two percent seems like a pretty good stopping point built in a slight term premium called the band two to two and a quarter percent. I think we get there over the next several months.

Over the next several months, we had an important and emotional point, what's the experience of JP Morgan on what that will do to issuance, to the dynamics of the market that we don't look at each and every day, Well, you should see issuance continue to to come at a

very high rate. When we talk to borrowers, their cognizant of the fact that growth and inflation are picking up, that the FED will begin to lift rates, that their funding rate will go up, So they're starting into put in place additional amounts of long term funding at what they feel are are secularly low rates. Well with Michael A. JP Morgan as in management the CEO of or will

Fixed Income. Off the back of this decision from the White House, the President of the United States to nominate Chairman Power to a second term of the Federal Reserve and alle a governor brain and potentially to FED Vice chair. The reaction in the market is pretty clear. Yield tire through the curve, particularly at the front end of the curve. That means a stronger dollar, and this equity market open by about advance and a half of one percent. If you break down a sector price action, there is a

big tilt higher in the financials. The banks Lisa ripping the financials up nine tents of one percent off the back of this bond market move. And this really speaks to the idea that banks hinge, particularly on that front end rate that gives them more net interest income. What is interesting if you look at the yield curve, it

is flattening. If you look at, for example, the gap between five year and thirty year treasuries, it is actually the narrowest it's been since March of so long term this is perhaps a more dampening effect on longer term inflation expectations and yields. But Michael, December, when the Federal Reserve meets and we get a news conference, I've got no idea when the hearings are what are you looking for around that time at a time when the Fed

chair is looking to get confirmed for a second term. Well, we've been talking about that, and and it looks as though the reappointment process, since he's the current sitting FED chair, could take no more than two months. I would expect very devish rhetoric coming out of the Federal Reserve between now and say mid January, until the reappointment has gone through Congress. So, Bob, what do you think of that? Now? With Vice Chair Clorida potentially just unleashed, you can say

whatever he wants to say. He made a move on Friday to talk about maybe we need to discuss the type of pace. Governor wall is already out there saying the same thing. How do you bout that away in the middle of December? Do you know what? I love hearing to the former f O m C officials. They're so candid and unlike anything we've seen when they've been sitting.

But you know what, it doesn't really matter. You have a re a point of chair, you have a new Vice chair um and the vote will coalesce around them going forward. Do you think it compromises the December fifteenth decision? Well, the way you see things right now, they're gonna have a new set of forecasts a new dot plot. Those forecasts have got to be adjusted for the incoming inflation data. Do you think it compromises that meeting? UH. I don't

think it will. I think that the expectation for that meeting all along has been Boy, we can't wait to see the dot plot. I wonder where those will be. But because they've just begun the tapering process, all the commentary and rhetoric around it will still be somewhat divish that. You know, things could still be transitory. They don't want

to rush into starting the rate hikes cycle. Those are two distinct and separate things until a lot of the lost unemployment has been recovered, extending beyond futures, John, what I see here is SPX up seven points, now up fifty x points, even the VIX coming in with a vengeance. Michael McKee with us along with some wonderful guests to comment the next man. It's Michael McKee. The market votes, the market is voting, and as Lisa mentioned, an interesting

move for banks going higher. UH. That is probably because lele Brader was not chosen as the vice chair for Supervision. She was seen as a tough regulator on the banks. Which means that the next three appointments that President Biden still has to make could be quite important and could be definitely h sort of assigned to the left wing of his party that he is hearing their concerns, we

might actually get a tougher bank regulator. You look at the nominee for the Controller of the Currency and you think the Biden administration doesn't have any problem with being tough on banks, So perhaps celebrating that too early might be a mistake. Uh, Elizabeth Warren is probably going to like whoever gets chosen as Vice Chair of Supervision and to other seats. So the president still has three seats

and no indication of when we're going to see those. So, Mike, looking at the banks in particular, there is this question about the yield curve contracting and that typically being negative for the banks. We are seeing that to some degree, whereas a lot of their income does hinge on the front end. Do you really think that the regulatory backdrop is so material right now for the banks given the Fed's role. Not at the moment, And as Bob was just saying, I think a lot of the reaction we

see in the markets is knee jerk. The regulatory issues will be more important as we go down the road, but front and center for markets, both in fixed income and equities and also in currencies is going to be how soon the FED raises rates, how strong the US economy is. And while the Fed may wait a while to raise rates, the guessing game is already underway and every piece of data is going to feed into that. And higher rates at the long end, in a sense,

will be good for the banking system. But the cocominant part of that is that if you have higher rates and it slows down business, it may slow down lending. So there there's some good and bad ahead for for people who are trying to trade banks. Mike McKee on the composition, the potential composition of this f O m C a fantastic lineup through the next twenty minutes. We're here from preamisra Eric Friedman. We're here from Danny blanche

flat To on this decision from this White House. I've got one final question for Bob Michael JP Mark and Asset Management. Bob, for the people just tuning in to put you on the spot, if you had to bet for next year, zero hikes one two, or more. Bob Michael, what would you be going with right now? Two hikes September and December? Bottom line, simple, easy, Bob Michael. Good to catch up, sir. Thanks for logging on and catching up with this very quickly after that decision. We appreciate it,

Bob Michael. There, JP Morgan Asset Management, Lisa, Bob Michael looking for two? Yeah, well, market right now consensus is for two questions, just as when July or June even being potentially where it is. Honestly, how much discussion is there about accelerating the taper, especially with a vice chair Rich Clarida unleashed chairman Pound nominated for a second term by this White House governor Brain had nominated to be elevated from governor to FED vice chair, that decision coming

thirty eight minutes ago. Happy to say that joining us now is pre a miser of TV securities preor yield hire up five basis points on two's, four basis points on tens. We faced just a little bit. Can I

get your early reaction to that decision from forty minutes ago? Sure? Thanks, John, So yeah, I think the market was pricing in thirty chance of Brainer's or if that's been taken down, I think the market is putting higher rates in that front end with the view that Governor brainer it was likely to be more dubbish, was more likely to be ideologically waiting for the labor market to recover fully. So I

think the market is pricing in that. You know, I think the idea that there will be continuity but power might be stepping away from this idea that the labor market needs to fully heal. But I will flag that the stalk around accelerator deeper. And let's see from the minutes, I think it's way too early for the Fed to be talking about accelerating taper. Maybe we see that in the minute. I think that's also playing into this, because

the accelerat taper, they can hike much sooner. The market now is pricing in the first hike in June of twenty two. So that tells you that it's the combination off I think Jap I'll getting renominated plas. Now you have three Fed officials talking about an accelerating tapers. It's a combination of the two. Jean Bava with a Bank of Canada and now at black Rock and really truly a first rate economic mind out of Princeton with Blinder, I should say, and Jean Bova says, we're getting this wrong.

It's not an inflation watch, it's an employment watch. Your call is on the edge. You are the outlier call preamsra fold in the unemployment and wage growth dynamics to your call that this is a FED that will wait

and wait. Right, So, our economists do have the FED not hiking until well into two thousand twenty three, largely because of that labor market point, because we do expect people to over time there are frictions in the labor market, and so it hasn't happened so far, but through the course of next day to people for people to return to the labor market, and that's going to put download

pressure on wage inflation. And ultimately we think that CPI or pc SO inflation numbers are not sustained if you don't have wage inflation, because you know ultimately it's going to hurt growth and and and and consumption when when that purchasing power um is not there. So I do think it's it's it's about the labor market. And if we see a fiscal drag next year, we see people coming back. So there's this hidden slack in the labor

market that starts to show up. Then the FED will I think be vindicated in or at least those on the FED who are arguing to let it run hot will be vindicated in the fact that inflation is likely to come off and there's no urgency for the Fed to hike, but it is going to come down, yes to to that labor market. Do we see people return or COVID such a structural shock to the system that people have left permanently. I think that's really the big

question for the next six months. All in all, your call again is just you're just incredibly against what's going on now, the calls that are out there, the worries is John gamed out tapering and rate rises and such. What do they miss estimate? What is the thing in this November the time of outlooks. What is consensus most

getting wrong? I think it's the so that the couple of things, it's an idea that the FED is under pressure on the inflation front that they won't be able to withstand months, you know, month after month of high inflation prints. And this is where I'd say the new FED officials coming in or or governor brainer as the new vice chair. Assuming all these get confirmed, I think that's going to be important. Can they withstand that show?

And even if power might be taking a tiny step back saying, you know, maybe we need to reassess policy or we need to be humble, I think so so so the market. Maybe some may be misinterpretting how quickly the FED caves under inflation. I think that's part of it. And part of it is fiscal drag. I think the assumption is that the high savings of the consumer will

be enough to offset fiscal drag. But when we look at the composition of savings, much of the savings is actually the top one percent, And so you know, when the fiscal drag is felt by the rest of the economy, we think it's going to impact growth. It's going to impact that goods to service consumption shift that everyone's looking for.

And savings may not be enough, and maybe people want precautionary savings because we're in a world where there's a lot of uncertainty out there, so that might be misunderstood as well. Always always feel lucky to catch up with you, particularly this morning off the back of this decision. Prayer

miss or that of TV Securities. As we learned that the president of your noted size is nominating Chairman Power for a second term at the top of effect and looking to Allifi, Governor Brian from Government of Vice Chair of the Federal Reserve, and that decision coming about forty three minutes ago. You will hear from all three potentially

at once twenty eastern time. When we hear from the President of the United States, get that one of the diary one twenty eastern the President of the United States, Chairman Pale, Governor Brained once twenty eastern. Tide will take that in full. On bloom Blog, TV and radio. We talked a lot Tom about this move in upon market. Let's talk about a move in the equity market. All time highs on the SMP, record highs on the Nastack John, the Nastic one hundred is a great story. The three

of US un surveillance twelve months ago. We're listening to the death of technology. John Galub of Credit Squeeze really encourageously pushed against that. But John, I'll tell you Dow up se maybe Boeing and does Standard and Poors up. John, I wasn't aware till this morning. Year to date, nast deck one hundred is outpacing the standard of purse. That's a vote for technology and growth is a massive move.

Tommy right to point it out, and please to say that joining us now, it's Eric Friedman, the chief investment officer at the US Bank Cassette Management Erik. At times like this, it's difficult to distinguish between a knee jack reaction, a move that might not last five minutes, and a move that might be a little bit more durable. How do you do that on a morning like this morning? Eric hit Jonathan Goomring, thanks so much for having me on.

I think your your point is as well taken. I would say that some of the movement in both the financial sector plus small caps this morning is a reverse able. We saw the past let's call it six seven trading sessions, those were the spots of the market that were really under relative pressure. And and so I think that part of today's uh, let's let's call it the side of relief, if you will, from the reopening trade is the idea that we will have some continuity. So I would say

that our viewpoint remains the glass is half full. Clearly this is a FED that's not going to be as much transition as markets perhaps thought as early I should say as late as as Friday Saturday of this weekend. So Brainard was was certainly viewed as as a transitional pick. And perhaps what this means, Jonathan, is that this is the administration saying, you know what, let's let's keep an an oilve branch if you will, towards the other side of the aisle, and having a know, a continuity with

which are Powell. We of course had mid terms of which are less than that less than twelve months away, so so continuity is really the word of the data. We still think this continues that that class half full mentality we've been we've been talking about with clients. Erica.

Jim Bianco of Bianco Research messages in pointing out that the market now has three full rate hikes priced end for all of next year, beginning in June with a seventy nine chance of a rate hike and then going on from there even May has a significant probability put around it. What would happen in equities if this rates

market is correct? I think, Lisa, it's it's something that we look at June as probably being that that transitional busk do We think that May is probably a bit early, and you've done a great job as a team covering the tapering dynamics. So for us, it's really more about the terminal level. And I'm just again so enthusis asked

listen to Tom's consistent message about terminal cash flow discounting. So, in other words, if the market is wrong and that that terminal rate is going to be higher than one point five one point seven, that's a that's an equity

market that has to read price lower. So for us, we think that the the initial wave of of lift off, if you will, that can be whether it's it's June, whether that's the July twenty seven meeting, those are those are okay in the marketshiest, But I think that what would be a really really challenging outcome for markets least would be if the Fed starts talking up a higher terminal rate that's not priced in right now, right now, What kind of data would we need to see with

the Fed need to say to start to move up or signal that that ultimate Fed funds rate would end at a much higher rate than the market's expecting at leasta with the with the pal driven FED employment data is going to be just mission critical. He has gone out of his way to signal that that is a

that's that's the marketis Pink most close attention to. So if we see labor force participation pick up, if we see people move away from the sine lines and actually into the market, but also, I didn't the jobs market, but then also into a more wide spread set of jobs, that would be the critical level that we think would be the signal if you will that that share. Powell says, you know what we we we thought the market, the

labor market would be stubborn. They're not, and we may have to raise it rates faster as well as higher. Eric Friedman, thank you so much for joining us this morning. Greatly appreciate it as well. Joining us now from Dartmouth College. Of course, a gentleman was set with the Bank of England and is definitive on our monetary theory, our employment and our wages. David blanche Flower joins us this morning.

Professor blanche Flower, thank you so much. What just comes down to Jean Bevan, you know of the Bank of Canada, uh and I believe a team that lost to Dartmouth and Ivy League football this weekend from Princeton as well, Jean Bevan made very clear this is about jobs. That is your wheelhouse. Should Sherman Powell and vice Chairman Brainerd should they fear wage growth? No, I don't think they should fear it. I mean we've seen so little wage growth in the last fifty years, so I don't think

they should fear it. But I've listened to all the commentary going on. I think these these appointments makes sense. I think Powell has said something which I really agree with and everyone seems to admit, which is the faedest sitting waiting and watching and could move in either direction. And I think much of what I've been listening to is getnomic. It really depends upon how this economy moves, what long run changes in behavior there are, and what

happens to the virus and cases are rising. So I think the answer is that the market's got well ahead of it stuff, just as it did at the Bank of England, and we'll see what happens to adjustments in the labor market. I mean people have been retiring, people have been leaving, and part of it I think is temporary because of the virus. Obviously when people's four are one case have risen. But we really don't know or what these market reactions are going to be, especially in

the labor market. Do I think the market entire got ahead of itself. It really depends on what's coming. I mean I understand that you know, if this then the answer comes. But bank presidents coming out saying, you know, we should be tightening the three rate rises coming or that's for the birth. I mean we have always got to do with that. You know what it was like in the Bank of England for you forgive me, Danny,

because we have to keep it pretty sure. And what we'll do is we'll rebook you and have a longer conversation. But just to find a word on this, how do you remain patient? How do you communicate this that you're willing to wait with inflation with the six handles? How would you do that? How would you guide it? I would say that we have seen recent rises in inflation. It's not that Fed's job to respond to every single month.

The question is what happens eighteen months ahead, and we don't exactly know that we're going to sit and wait and see if this pattern repeats itself. And I think Power has really been spot on where he kind of pushed against we're just raising were he said, there's possibilities in the other direction. So I think the answer is the quick question, is this stuff going to get repeated and are we going to see rises in two thousand and twenties. If we do, then you have to respond.

But if you don't at all, the price of the phone in the world, container index is falling and the Baltic dry is falling. If those things continue the path, it will be very different to what the market says. And remember markets got a completely wrong in o as well. Danny always appreciate catching up with you. I know you've got to tie schedule as one of this morning, So thank you, sir, Danny Blanche f there down. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple podcast, SoundCloud, bloomberg dot com and of course on the terminal. I'm Tom Keene, and this is Bloomberg