Global Data Pod Weekender: That's gonna leave a mark

Welcome to the JP Morgan Weekender. I'm Bruce Kasman and with me this week from places unknown is Joe Lufton. Hey Joe. Hey Bruce, how you doing? Okay. You're in you're actually in London, right? Yes. Long week on the continent and uh and now in London, yeah. Okay. So let's let's jump into this. I mean there's

You know, there's not a lot of news on the ground on the conflict and nothing from a macro point of view that really changes things. We just go another week and we still don't have uh Which is an important point, right? That is I that's where I'm going. Okay. Yeah. Second air. Yeah.

Um, you know, I think on the data front it's still too early to see uh anything in activity readings of which we still don't really have much in the way of March. We have almost nothing. The surveys are giving us a little bit of a flavor that there's uh Some hit to sentiment in the early March readings we're getting. And um what we clearly have is in financial markets, I guess you could argue this is a stagflationary tilt because we've been pushing up interest rates, inflation um

uh compensation in the short end. And we've been seeing some sense of risk aversion hit um uh broader asset uh prices generally. So I think the markets are pricing in a stagflationary tilt.

Um and you know the baseline we've been using, which we're not trying to justify as a a modal scenario, but we're just using it as a loose sort of um starting point for conversation of a hundred oil through um mid year and then sliding towards eighty uh with some sense of a receding conflict. Uh, still I think gives us a decent starting point with this idea that it takes about six tenths off GDP growth globally.

for this year and adds about a percent to the inflation uh rate. And that's that's the starting point. And then what you just were mentioning, I think is important is that every week we go

without a resolution here, um, is a week of energy supply being constrained in a significant way. And we start to lose the buffers we've had. I think one of the points our commodity team has been making is the starting point for the shock is a market that was generally oversupplied. So that some of the pressure on price and some of the concerns we have about uh supply uh constraints uh in specific regions

uh had that buffer of where the market was positioned coming into the shock. But that can eat get eaten away pretty quickly here. Um, as you and I have both both mentioned, the notion that um keeping half of of the Strait of Hormose supply off the market for any material length of time is not consistent with a hundred dollar rent. It's more consistent with a hundred and fifty, maybe even higher. Uh so this is a a a ticking clock which we are

clearly needing to be thinking about. I mean, there's also the other side which I don't wanna uh ignore, which is if we did have a resolution quickly, um, you could get a lot of oil thrown back on the global market quickly and and that could change things as well. But in addition, I guess where I just wanna kinda throw out a couple of points and then maybe turn to you is the issue of let's just say for argument's sake, we're not in these extreme scenarios on energy supply and price.

uh and we're kind of in something close to the baseline, I think we then have to talk about context of where we are. And one of the points is that we are in a world in which the uh momentum into the start of the year is strong. On the other hand, we have

uh vulnerabilities and those vulnerabilities I think come from the potential for what we've been identifying as a sentiment lift going on driving activity to be short circuited. Another vulnerability we have is the um idea that we got through uh last year's labor market weakness through a consumer that has smoothed and uh we may be having to ask them to smooth again with an energy price shock. in the near term. And a third vulnerability is that

central banks just do what the markets are suggesting they might be doing here, which is tighten early into this in a way that pushes interest rates up in a way that kinda hits us hard. So we have a tension in the macro space between the global economy that was carrying good momentum here And I think some of these uh issues that um might end up magnifying it, even if we're not talking about a hundred fifty, hundred seventy dollar uh crude oil prices and people having to

shut down production'cause they don't get natural gas or energy supply. Uh so I'll leave it there, Joe. Tell me where you want to go with the conversation. There's a bunch of things to to to hit on here and I'm sure to argue about. But uh Yeah, I mean I I would

I would start with the idea that there's kind of two veins of the the conversation. One is the the geopolitical side and then the other is the macro um kind of spillover both on the on the growth and the and the central bank side. Just quickly on the geopolitics conversation.

unfortunately is the both the area that is the least of our expertise but also the most important for how this plays out. I I would just emphasize what has been striking to me all week is the the idea that when you read most of the reports on this, it's as if Trump has all the agency, the the whole Um, Trump's gonna back off. He's desperately looking for a an off ramp here and therefore every time you get a hint that he's gonna try to find that off ramp.

you get a uh this elation uh trade when in fact all the agency in my opinion is with or mo a lot more is with Iran. They're the ones that control the Strait of Hormuz, they're the ones that's gonna wanna exact a certain amount of pain on the market so that uh this doesn't happen again. And I think that risk, that upside risk on commodity prices is just not nearly enough.

uh in the markets, partly because front end is supported, as you noted, the the oversupply at the front, but this thing d definitely can go parabolic pretty quickly within the next few weeks. And therefore the odds that this is 150 or higher. And we're talking about not a ticking clock, but a ticking time bomb uh in terms of what that does to the global expansion.

is should be very real and is doesn't seem to be appreciated in risk markets, certainly not in credit markets. Um and frankly, I think in front end rates markets in terms of how central banks are not. When you say you have a you have a target for where you think the S P should be right now, I mean when you say it's not appreciated.

How how are you making an assessment of what is an appropriate risk premium to be priced into markets right now? I would just say we shouldn't be opining on this with any degree of conviction. But you're just saying you don't think it's appreciated, which means you have some idea about where we should be priced right. Well, I mean, my understanding is credit spreads have not really moved much at all in this. Does that seem right? Does that reflect the risk that you see out there right now?

I I don't I don't know where they should be. I mean it depends partly about What kind of probability are you putting on what kind of

price and macro outcome. I I just I just think you want to be careful and not going too far in telling people what kind of risks are priced in markets without having some sense of what you think the appropriate risk should be. I can I can I can say that what what I read out there is a a a a sense that the US has the ability to end this thing quickly and that if all of the ships go away and the bombs stop dropping, that everything's gonna be better. And I think

That is the view that is kind of priced into risk markets now. And I think that's not right. But fair enough. I I fair, let's not dwell on this, Bruce. Like that that Fine. I'm just telling you where I think the odds that we get to one fifty are pretty darn high right now.

Um and so that's kind of point one. In terms of the the the shock and the spillard of growth, even in that baseline case that we laid out. Um, and I know you're on board with this because you I've been kind of seeing the flow this week in terms of how we're talking about this uh with the team. We have not reacted even to that, what I would say is a very benign outcome. We have a very this one hundred floating back to eighty by year end is a very benign outcome. And if you get that

You said six tenths, I would say, okay, yes, that's right. I'd probably say you adjust over two quarters to these shocks, which is usually about how you do it. So now you're talking about one and a quarter percentage point off growth, and we haven't we haven't touched our growth forecast much. I agree. On that point, I think there's a something of an offset with the uh momentum at the start of the year. I would also just say I think your view on how quickly growth gets it here is is kind of

One which I wouldn't take a very strong view. Um I mean, Bruce? I mean you you kinda talked about vulnerability. When did European growth get weak? And Europe was hit very hard by the Russians. shock in terms of natural death. It didn't work. They were, but Europe was Europe was booming through that period and had massive fiscal supports, and then suddenly they went to like little to no growth. But that's my point. My point is that context we're not booming now.

We're not booming now. We don't policy rates were negative then, Bruce. You had tons of fiscal coming online. You had demand coming out of the woodworks there. The point is context matters. And I think there's in which these oil price shocks. Hit inflation very quickly and hit growth somewhat more slowly. There's no there's no predictable and I think I feel like all of the usual rules of thumb that

Oil shocks actually hit quickly that central banks look through oil shocks. It's like all of those things have been thrown out the window with this this kind of unique shock. No, I don't think they've been they've been thrown out at all. I don't think I think you see oil go into headline inflation quickly and headline inflation hits consumer spending quickly. Well there's there's yeah, there's uh there's definitely that, but the overall impact on growth

Depends on things like how much fiscal support you get, what is the momentum in the economy as you go into it. Let me finish. Let me finish. It depends on how much consumers smooth. It depends on a whole host of things. Which in terms of the inflation response, that immediate response I'll I'll give you highly predictable and highly confident. Right. I'll give you the momentum. I don't know what that means, but I'll give you the momentum into the first

quarter. That I think that's that's a fair point. Uh I but I'd also say I think fiscal is a lot less clear because what you're seeing and again if we're talking global is Some of these fiscal supports are actually somewhat constrained. I thought it was interesting that Thailand had to pull back their fiscal supports because of some of the fiscal uh that the shock was starting to get too big. I think in places like France there's not like a lot of uh uh kind of

uh ability to to absorb this. I think in the US, it's not clear you're gonna get any more added fiscal support. I think what you said up front about the the vulnerabilities is right. I would frame and it's kind of the same thing, but I would frame it more as In addition to the direct hit and shock of energy prices,

It has an interaction what with what has been the fundamental supports for growth this year. So the sentiment was central and key to ours. And this shock undermines that. The tech boom, which we have continuing this year. starts to get hit because Asia gets hit. Something different. You're talking about vulnerabilities. You're not talking about a baseline.

No, I am talking about baseline. I'm talking about a hundred dollars per barrel, and what we're seeing right now is undermining the tech boom. I think it's undermining some of the fiscal. We have this this uh refund that's supposed to be coming. Well every dollar of gasoline is worth thirteen billion per month. You extend that for ten months, that undercuts the refund.

That's what's scaled into the into that six tenths, Joe. You know, you could argue it's Oh, I know it's no no Bruce, I know that. Have we reduced US GDP by one and a quarter percent annualized in the next two quarters? Right now we're talking about two different things. You're talking about magnitude, I'm talking about timing. Well you said six tenths, that's a magnitude. Yeah, but the The point I'm making is that

When I'm talking about timing, you're switching to talking about magnitude. You I'm saying we got six tens. And I'm not confident in terms of putting all of it into the second and third quarters, which is what you're saying. That's six months. That's a long time. That's spreading it out. Well And if it's operating through sentiment, sentiment shock

the the purchasing power shocks. Households don't wait six months before they react to a purchasing power shock. It's hitting people who spend hand to mouth. That's real time, immediate. And this is what you see energy price shock. Hit purchasing power immediately and consumer gets hit quickly. That has been the way we have always talked about these types of energy price shocks.

And the the reality is that when you have a shock that is viewed as transitory, consumers tend to cushion the blow and smooth it. If it turns out to be longer lasting, it has longer effects. No. I'm gonna say what's what's so hard about that. Because I because you're just saying the opposite of what I just said and the reality is if I just draw you a chart of consumer spending and consumer income. You can see this room over time. Now clearly

Or if you have an energy force shock that is associated with a recession and the labor market breaks with it, then these things become magnified and they become immediate. There's no doubt about it. But the normal reaction to any price shock, the normal reaction to any income shock that is pre that is transitory, which is what we saw last year in the face of the falling in labor market.

is the concern tends to smoke. Right. And and last year you had a massive stock market gain that allowed the saving rate to fall over the past two years, two percentage points. Now you're talking context and you're talking vulnerabilities. What I'm saying Well, I'm talking about the smoothing. The smoothing ability. The norm is to smooth. The norm is to have these shocks play out more slowly.

The context can matter. If you're going into recession as we were in seventy three, seventy four, as we were in seventy nine, eighty, as we were in nineteen ninety in the US, look at Europe in nineteen ninety. What happened in Europe? In nineteen ninety. It didn't go into recession when the uh Kuwait invasion the Iraq invasion of Kuwait happened and oil spiked. It didn't go into recession at all. Look at what happened in twenty two. The US did go into recession.

But the Europe didn't and had the same energy price. um uh predictable. That's they they are. You take the context, and the context we have now is nowhere near as much strength as you had under reunification, nor the strength that you had in twenty two.

And the delta from what was very strong growth in twenty two to actually a very weak to a stall growth. I think one of the things we see over history is that our perception of what we think was the context on growth changes quite a bit once we see impact.

If we go to the 50 to 60 percent 50 to 60 percent of households live hand to mouth. So when their purchasing power gets hit by one percent, what are they gonna do? They can't go down to their JP Morgan account and sell some of their JP Morgan shares. And kind of l smooth through that. The idea of that everyone in this economy can smooth

Super wealthy people living all that's why you had this K-shaped recovery. And you you you have a lot of people in pain here. Now you don't have the wealth effect. The saving rate is a lot lower. These are the vulnerabilities and the interaction of this shock. with those vulnerabilities makes this probably be a bit more of an immediate effect. And I would wanna see that take place over the next six months, which is a pretty long period. Okay. All I'm saying is I wouldn't be too aggressive.

in terms of timing the impact on growth here. I think it could go both ways. I'm not trying to be very clear at predicting. I yeah. I think we see the inflation. It comes quickly. We're gonna see some of it next week in the Euro or H I C P and then we'll kinda have to deal with the momentum that is

I think clearly up to the case. So let's and let's let's have I think we're gonna have a decent private peril game next Friday. We're not nothing boomy, but I think we're gonna look for something clice close to a hundred thousand on private perils next week. I thought it was seventy five. It's seventy five on total, eighty on private is our four.

You just said a hundred. I said something close to a hundred, yeah. Oh, okay. Okay. Um we could argue between eighty and a hundred thousand on a number of forecast, whatever. No, I was just wondering why you said a hundred. But uh uh so I I mean To the extent that you've got um uh

a big tail, if we just kind of let's think about all the full risk distribution, you've got a non-trivial tail. Maybe it's bigger in my mind than yours, but I think you would think it's non-trivial tail that we're at 150. We have a sense within this kind of baseline view, which um is fairly, uh not fairly, it's very benign outcome here. Um, I think I'm making a case. that growth is gonna get hit from this. So now your distribution of risk of a bad growth outcome is fairly large.

Well, I I think that's starting to be priced in markets. Fair fair enough. But the difference between what we're saying are priced into front end rates markets. Slow down. So down a second. The difference in what we're saying is not that we have a different perspective on the idea that there's a tail here and energy prices could be high and there could be disruptive effects on supply. And let's Talk about what happens with the I I I agree.

as much more skewed to the downside than I do in that scenario where we don't hit one hundred fifty on oil. Right. Right. I agree, Bruce. And so let's just say there's some disagreement between you and me under this benign scenario. All right. But let's say someone then has to look at our two arguments and put some weight on each of those. Bruce, do you think we're gonna sail through this if we say at a hundred?

I think there's gonna be a lot more damage. I think there's gonna be a lot more damage to growth if we sit at a hundred. And we both agreed there's a big negative tail here that has higher probability than people are probably appreciating that we're up one fifty. So you add those together. And I think if I'm just taking the the expected value of this, we're getting close to getting that fifty percent of where you're you're at at recession.

You know, and put it in terms of putting a a forecast in. I mean wait where do you think? I I thought you had already said that I said thirty five percent chance of recession. You said oh I'd put it higher than that. Yeah, I'd say but but my recession probability is high because I think the risk of something going I understand parabolic on energy prices highlight. That's fine. That's fine. I think if we're at a hundred and and and and sit, you know

roughly there for a few months and then start to see things receding, I don't think the risk of recession is very high here. Yeah. So what do you think the risk of recession is in the baseline? Um well before Iran we were kind of saying twenty-five. I think if oil stays at a hundred, I might nudge it up to um thirty-five. Yeah, so I'm not I mean the the argument And then you take into account this big negative skew. That's what I'm saying. I'm getting close to I mean

I mean we're kind of breaking news here. Do you think it's above fifty? I mean that the odds of of being at one fifty on on oil seem pretty high here. Um I mean you got Natasha saying in a couple weeks this thing that all that supply cushion is gone and this thing goes parabolic. Yeah, I don't want to put words in her mouth. Don't put words in her mouth because that's not her price for it. No, no, I uh well, but I don't know that under that scenario, that's not our

Right. I'm saying if if we go twenty on that to just for what it's worth, and I was pressing her on that. State again. What what is it? The oil not being opened up but the Strait of Hormuz, over the next three or four weeks we're going to a hundred and twenty on crude. And when does it get to one hundred fifty? I don't know exactly, but that's a six month uh something of having to have the uh supply being restrained at the current level for six months or

Six months it takes to get to one fifty. So if we're sitting here in six months and nothing is flowing. Somewhere between two and six months. I don't know exactly where where but she doesn't have oil at at one fifty in the next four weeks.

Not her forecast with unchanged supply conditions. Yeah. Okay. Um let me let's get the let's get into the other issue here, which is If anybody was gonna listen to you, you should have central banks easing right now. I think you receive an either just about every way from here. Uh right. Cause I think if you don't get a big shock, but this is the other point that I've been pushing. If you don't get a big shock.

I don't see enough of an inflation problem to pull core inflation up. Like why should we be worrying about this, right? Why why should a central bank hike into a modest energy price shock? Well there's two there's two distinct questions here. One is what should you do preemptively before you've seen the evidence? And the other is what is the actual uh impact going to be?

Well, there's also another issue, a very important issue, is there's and we're gonna have a conversation of what they should do. There is the conversation of what they will do. Right. Um but anyway, go ahead. On the on the should, like my my sense as I said, I think they should look through this. Well, I think they should be patient.

Yeah, that's what I mean. Yeah. I think the patients should let them take some time to see what's gonna happen. But my starting point here is growth is running about a half a percent above trend this year. And if I take half a percent off because of the m not uh a gr not, you know, nonlinear shock, but the the one we just talked about at the baseline, then we're running trend growth.

Uh if I add uh percent to inflation, I'm also adding to core inflation two or three tenths with some of the pass throughs. to things like transportation costs and other things going on here. That seems a bigger a bigger pass through from energy price shocks than I remember. I thought it was a lot lower than that. I would have said a lot lower, but here we go. Context context matters. You're gonna

You're gonna you're gonna you know, No, no, that's fine. That's fine. I look on the inflation side, Bruce. Um you know I've been the on the hawkish side of the of this conversation, right? So certainly for the Fed. I feel like that trade has played out brilliantly, even if for reasons I wouldn't have thought, right? The idea that

we were going to have the Fed starting to talk about rate hikes this year. Well, that's happened. Right? Obviously it's because of this energy price shock, but I get it. We're in an environment where inflation's running hot. I'm glad the Fed has finally realized that we've run five years above target inflation, right? Fool me five times, shame on me, right?

That's happening. So I I get it that context matters. I definitely get it for the Fed. I get it less for the E C B. That's the last place I kinda would have thought this was. going to be an issue, but um that's probably the one that I have the bigger issue with. My point is why are you receiving everywhere in the absence of a more nonlinear shock? In a world in which oil is staying in an eighty to a hundred dollar rate you're gonna have you're gonna have growth.

Still sitting close to trend. You're gonna have inflation being elevated. You're gonna have modest pass throughs. decor in an environment in which it's already elevated in most places. And then you got a wacky European central bank reaction function where these guys are inherent very I mean I was kind of being why are you not why are you not taking into account a serious risk that we get central bank tightening here, especially given the way you pos said you positioned yourself to begin with.

Well, because I was less in that camp. You that's what what you're embedded in there is the idea that even if we don't go in the non linear scenario, we're gonna have much bigger impacts on growth, right? That's what I do think there is. Yes. That's what you I don't I I didn't say five percent, right? Why why'd you say five percent? In that scenario, I mean if you're If what do you think of that scenario the U.S. unemployment rate is going to be in six or nine months time?

Um if we stay at a hundred, I I I don't know. I think eighty in the second half. Yeah. What is it you would put in there? Um I think you'd definitely take you you you'd take off uh, you know, a percentage point, maybe three quarters of a percentage point of of growth through the middle quarters of the year. Um You know, uh I think you do worry about the labor market hit from that, which by the way, we talk about strong momentum. It's strong momentum on GDP, not strong momentum on labor market.

Um, and so labor market is already weak, which by the way also looks a lot like nineteen ninety, when the Fed did look through a rate uh or uh uh an oil price shock and they cut. uh in response to that. So Oh wait, wait, wait a second. Wait a second. Yeah. The economy as defined by the NBR was in a recession a month before Iraq invaded Kuwait.

The economy is the same as it was in nineteen ninety. The economy was Well, but in nineteen ninety at that point did they know they were in recession? No, but do we know do we think that there's a chance that you're going to describe the economy as being in recession now? If if you get if Bruce, if you get two more contractions in payrolls, yeah, I think there would be. What is your uh forecast on the odds that the economy is in recession as of January, February twenty twenty six?

What is your four what is your four that we will read that'cause that's where we were in nineteen ninety, Joe. That's the yeah that's the comparison to nineteen ninety. Yeah. That in January and February of this year we're in recession. How comparable is that? Yeah, I don't think the odds are high. What do I think the odds are that we're in recession in the middle quarters of this year?

Not com no no, that's a different story. You're now starting to do it. I don't wanna get cued about like a couple of months about when this is going to when that recession is gonna start. You're talking about context and I'm talking I know, Bruce, but if you're in a recession dynamic, it's not gonna be the beginning, you know, we're not gonna be fighting over whether it started in February or or May.

The Fed eased in July of nineteen ninety before Iraq invaded Kuwait. So they were easing into this because that you they had a weak labor market. Yeah. Right. Inflation was still very high. Inflation was high. It was coming down. It was high but coming down, which sounds a lot like now. Weak labor market, high but coming down inflation, and you get an oil price shock.

Right. But I mean, I think we might find ourselves in recession, but A, I don't think we're gonna find ourselves in recession if oil is sitting at one hundred. I mean look, I'm not trying to argue that you shouldn't cut it. I don't think you should I don't think you should look at the Fed's reaction function in nineteen ninety. And use it as a guide to what they're gonna do now. Um

I think it tells you that since nineteen ninety they've kind of had a policy of looking through the floor. You want to discount the Fed's reaction function in twenty one, twenty two in an energy price shock, and you want to apply the reaction function nineteen ninety. I think neither of them are very good here. You well, I think the nineteen ninety is a lot closer than the than the twenty two.

I I don't think that's a hard case to make, right? And I think since nineteen ninety, the Fed has the Fed has decided to look through energy price shocks. What probability uh you put the next move for the Fed as a hike versus an ease?

Higher for higher foreign ease. How much? I wanted to say what's the I don't know how you put out the well this matters because we're I know. But we're dealing with scenarios here. What is the probability you put the next move by the Fed is a hike? Of a hike? Yeah. Probably uh it is a hike. Uh yeah, uh of a hike I would say uh maybe twenty, twenty-five percent. Maybe 30. 30%. What's the probability you put the next move by the Fed as an ease? 45 to 50.

Okay. I would I would what do you? I mean let's say let's say the hike I would maybe let's say fifteen to twenty uh hold I would put um uh you know 30, 35, and what I don't know, whatever the difference. 45. Remember, Bruce, we already said and you agreed that the odds of a recession are are 40 uh 40 40 45%. So surely they're cutting them.

And then you've got some odds that they cut even without a recession. No, I'm I'm taking out the scenario where oil goes to one hundred fifty or higher. Well you didn't tell me that. You just asked me a blatant question. What do I think the odds that they hike, cut, or stay on hold? Okay. Um fair enough. What do you think the odds are in a scenario where oil is not at a hundred and fifty that the next move is a hike versus a high Um uh of a of a hike if they don't Oh well then I

breeze through this shock and the and the economy's still doing pretty well here. You were arguing before that we're not gonna breeze through the shock at a hundred on oil. Yeah. Um asking Well breeze through the shock I mean like we're not going into a recession. Um And it well, a hundred isn't that big of a shock, to be honest. I don't know. I'd put the odds of a of a of a hike at um ten minutes ago. I'd put the odds of a hike of uh maybe forty percent, maybe thirty-five percent.

I think they're on hold. I think they're on hold. I think the odds of a hiker thirty five to forty percent. And we're putting a relatively modest risk right now on the non nonlinearity in oil uh prices. Maybe maybe I sh shouldn't do that. Then I don't know why you want to receive so aggressively here. 'Cause I would agree with you. I would I'd say the odds the scenario in which Oil is at a hundred and then drifts down. I guess this is where we're going to be able to do

Well I don't know where the again what we're fundamental. Yeah. We're talking about a few different places and and I'm not looking at the Bloomberg screen right now, but my understanding is that you have outright hikes priced in. Right. You have you maybe what, five, six basis points? That's not a hike. That's a No, no, whatever. I'm just saying you have posit I'm just saying if I were trading this, would I fade that six basis points? Yeah, I would.

Right, that's that's what I'm talking about. Again, I I'm not fighting the Fed. I'm not either fighting the the market view of the Fed or the Fed that much right now. I don't kinda like the reason that you took out sixty basis points of cut. I thought the sixty basic points of cuts were were ludicrous. I thought that you were getting more likely to see the Fed talk about risks of hikes and the language was gonna shift this year. Clearly that language has shift a lot faster.

than any v even I thought. Um but You know, them on hold seems like reasonable. I your your your kind of model of hey, they should move to business or caution, that seems like the right scenario. I would extrapolate that across the Atlantic, that the E C B was in a good place. Um we're we're not in a good place, but I think the risks are uh

Not even two-sided. I think the risks are skewed more to the downside on growth. And that I'm not caring about inflation. You know, uh, you know, if if oil goes to 150, 200, it's gonna be back down at 20 pretty quickly here. Right. You're gonna be in a recession. What's that? What's gonna be back down to twenty? Crude oil.

I mean, I'm being cute. I'm just saying if you go up to two hundred, you're gonna do so much demand destruction, you're gonna drive a recession and oil prices are gonna collapse. And the last thing you're gonna be doing is worrying about inflation at that point. Well, I don't have any problem with the idea that if you have a recession you don't want to be worrying about inflation.

And I don't want to lose the risk that we actually have a more nonlinear oil price shock. But where I differentiate is that I think if we're in the more elevated and then receding scenario, I think from the context that we're in, which is a relatively healthy underpinning of growth globally, uh an environment in which inflation is elevated. I think you are gonna see um

some spillovers to core. And I think you are going to see some pressures for central banks to hike, whether it gets significant enough for the Fed. to actually hike in that scenario, I don't know, but I think the my mind, if we're not breaking the economy because of a much larger oil shock, I think the risks right now of what the next move on the Fed is is pretty pretty even. Can can I can I can I ask on this? And I'm I'm this isn't argumentative in any way. I like

If you get this kind of core inflation pass through because energy prices are pushing up headline, and in our baseline forecasts, you've got oil going back down. That means core inflation's gonna come down. Equally, right? Well it depends on how far it comes down. I don't think that

If oil is starting at sixty five and then it goes up to a hundred. Well, it started at seventy, but okay. Wherever you whatever you want to put it at. It goes up X percentage point and then it comes back but doesn't come back fully. I don't think that brings your your your uh underlying pressures on inflation back to Right. But if I told you you went from sixty to eight or seventy to eighty on oil prices, what do you think the core inflation impact of that is?

Pretty much zero. Right. So that's what we should be at. Then by the end of the year. Our baseline is that core the core inflation factors should be zero. So we're telling everyone that Central banks, let's I don't want to get into should, but central banks will hike because core inflation is gonna immediately respond to this energy price shock. And then by the end of the year it's gonna be completely gone and they're gonna be cutting again?

Well, I think I think we're talking about two separate things here. One issue is what should be the preemptive response of a central bank to the shock. And I would agree with you that central banks are supposed to be taking their time here. And if these hikes in April, I think it will be a mistake, particularly for a region which I think is more exposed to the negative growth consequences.

So Yeah I agree. I I I agree. What is the consequences of a more sustained period of somewhat higher oil prices and a shock that does not derail the expansion in a significant way because it does get to uh that nonlinear effect. I think on the margin we're starting with elevated inflation and I'm gonna channel my inner Joe Lupton of five years of overshoot that inflation inflation is at three percent right now. And the argument for the Fed

To not respond to that is an argument that the forward looking path of inflation will be moving uh lower. But if we move into a world over the next six to twelve months where US growth is at trend or slightly higher, The labor market is rebounding to something modestly above a hundred thousand a month. And we're seeing core inflation be lifted a few tenths, even if it's only for twelve months or so by this shock.

Um the idea that running three closer to three and a half percent core inflation, having an unemployment rate that is moving down from its current level towards four and a quarter, and having growth stay at two percent or higher. The argument that that would not generate a scenario which the Fed could hike on, I think that's a mistake to ignore that. Why you I'm not fighting that path at all. You just laid out like the the total Goldilocks Planets Align path. Not Goldilocks at all though, Joe.

What do you mean? Everything's right in that world. No. That the sho this this the that the the all of this shock just disappears, that you're back in the wor th everything you described is the path I would have described things in before the Iran war. The idea that you

Have inflation going above three percent and the unemployment rate going down and the Fed tightening. No, I don't think inflation was going above three percent. But anyway, it was already above three percent. Core inflation on a three month basis was running close to four percent. If I if I've taught you anything in my life, Joe, it is that you can stop there. Yeah, I should stop.

Not be making a discussion about underlying inflation three month run rate. So please don't say that to me. It hurts me to hear that. Fair enough. Um So it's not Goldilocks because again the the issue here is that A Fed that is comfortable living with modestly elevated inflation is a Fed that's comfortable that over time it can see that inflation number coming down. The question I think is whether or not this shock

over the space of twelve or eighteen months and I'm not arguing it's gonna happen in the next three or six months. We're not having the same debate as we're having on the ECB, but whether over that time the Fed's confidence that it is going to come down gets challenged by dynamics around the energy price space, around the pass-through, and hopefully around the resiliency of growth. and the unfortunate weakness in labor supply which makes it a little bit more than a little bit.

The reason it's Goldilocks and and obviously it's not Goldilocks in the sense that everything's perfect. Conditional on the shock is Goldilocks. That the that the growth hit I think is just not big enough. In other words, you're getting a big enough shock. that somehow pulls core inflation up but doesn't hit growth. No, it does hit growth, but my starting point is that Barely. No, it's a half a percent off growth.

I'm moving growth from two and a half to two. Yeah. I don't know. I just don't I don't see that as a as a very big sh uh not that's not a big enough shock. It's not a big enough shock to move core inflation. And I think it's dangerous for you to to kind of use this to describe Goldilocks when the way we've been describing Goldilocks

up until now is it's an event that allows you to get solid growth, get in why is it Can I finish what I'm saying? Yeah. Yeah. Yep. And normalize policy rates. That's Goldilocks. Let's Yeah. This is the high for long inflation. Uh and there are questions I think that you have to pose if you go down this road and you reprice interest rate risk this this much.

over time whether that it creates vulnerabilities and financial market stresses unto itself. So I would not Why were you fighting me on the idea at the start of the year that the Fed would start talking about, just even talking about you fought me? talking about hikes in a world where you thought growth was actually gonna be even stronger than our forecast. So two and a half percent growth or more. Joe.

Yeah. I have never been expecting the Fed to ease this year. And I of course not. I know that. Yeah, yeah. I have been comfortable with the idea. that while it would be difficult to get the Fed to hike, that there were scenarios that by the end of this year that we'd be starting to price in hiking on the Fed.

What I was saying is, and I would I would not argue that on a nineteen person committee, you wouldn't have some people who would be on the hawker side who would start to talk about hikes. What I would say is that you wouldn't have the center point of the Fed, the guidance that's coming from the Fed. Right. Why not? Because'cause and by the way that didn't happen.

Do you know how many members at the March FOMC meeting had a hike in their forecast? No, I know. I totally agree. So why is it why is it that by the time you got to the middle of the year and you saw the US growing two and a half to three percent? And in your world, the labor market's doing well and core inflation should really be ripping because we're growing like a full percentage point above potential. You know that you're

Whatever. Okay. Well, I said two and a half to three. So let's say three and th through uh three quarters above potential. Um that you wouldn't be in a situation where, wow, they should really be two two things here. First of all, I think The dynamics on inflation I don't think were gonna be pushing you well well above three. I think you had a uh a a period in which labor markets were weak, job growth was weak for over a year, year and a half. That's having an impact on wage inflation.

Shelter inflation's moving lower. So even with good And all and the energy shock removes that? No, no, Jo Joe, you're you're now talking to what I was thinking about at the start of the year before then. No. I okay. So It doesn't remove it. The the start no I'm joking. It exacerbates it. It exactly. thinking more of the downsides, not this this Goldilocks scenario where they should be hiking into this energy.

And the economy weak enough to get subpar growth, I would say yes. But if you're moving you from above trend to trend, you're just taking out some of that pressure and you're adding some temporary pressure on inflation. So for me, it's more or less a wash

Right. That's the way I'm thinking about it. And the second point, and it is an important point, especially when we're thinking about the reaction to this event, is I think the Fed has a inherently biased view to think that their anchors will gradually bring inflation back to target without them having to do it. And I think those things those forces create sort of a a a willingness to be opportunistically uh

disinflationary without doing something. I think what shocks that is the tightening of the labor market. What shocks that is the um uh actual higher core inflation. Uh and I think those things can be uh In some ways uh even reinforced by the shock. gonna go but I think it could be if we get a little more pass through than than expected here. Um and we'll see how the how the trade off plays out. But I think it's a mistake to think I had some view that the Fed could not um You know,

talk about hiking. That that's not right. Well, no, you did push back against you pushed back against talking about hiking. I said that you center point as the center point of the right that Chair Powell would deliver. And Chair Powell has not delivered that yet. Right. You don't get a victory on that joke. Come on. No I'm talking about tight I

At least from the way that I'm describing it. It's not that you can't have one or two members of the committee. No, it's not that. The market has priced out which is what our forecast was. Right. Market has priced it out in the context of a very different set of macro impulse.

Which is what we're arguing about. And we're gonna end up having to end here'cause I've got to I gotta run to it. Yeah, I know, you gotta run. You gotta run. But anyway, one thing's one thing's for sure is that neither of us think the E C B should hike in April. Yeah, I don't think they should hike in April. I think they might be in a position where they should hike in in the second half of the year, but I think they should be given this I can see the path. I think it's a narrow path.

Okay. Well anyway we'll uh We'll leave it. I see that being in Europe for a week hasn't changed your inherent pessimism on growth. So I'll uh I'll uh recognize that and up and uh I think we'll end here. Take care, everybody. Let's continue conversation next week on the weekend.