The Fed raises rates yet again. No surprise there, but its forward guidance was. And how much are Republicans and Democrats actually thinking about the economy when they head to the polls Tuesday? Jonathan Levin, Jonathan Bernstein, and Stephen Mihm join the conversation.
Welcome to Bloomberg Opinion. I'm Vonnie Quinn. This week, even though it's sort of a dead heat in terms of what the polls say, we still could have fifty three Republicans. We could still have fifty two Democrats, three Democrats even. Jonathan Bernstein on the mid terms in the final furlong, and later Stephen Wim on what political sciantists have discovered about the correlation between mid term voting patterns and economic conditions. But first, we still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected. The Fed chaired your own Powell There Bloomberg Opinions. Jonathan Levin joins to discuss a possible Fed tilts this week. Jonathan, two of the statements that jumped out to most analysts were the fact that the chair sinks the path to a soft landing is narrowing, and that the terminal rate may be higher than we previously thought. Well, I think it's an undeal. It will be higher than we previously thought. I think palace task here was to thread the needle. He needed to prepare markets of the fact that he was going to slow the pace of rate increases, potentially at the next meeting in December, but almost certainly by the time the first meeting rolls around in three without letting the financial conditions loosen. And so the key to all of that was a stroke of communications genius. He did that at the same time that he said that we are probably taking the terminal rate higher. Maybe we're talking about five five and a quarter percent instead of four seventy five. But as a tool for communicating, I really thought that it was a stroke of genius pairing the higher end point with the ratcheting down of the pace. Well, it's redundant to point this out, but we'll have November, December, and January data before the January three first meeting. Will that data be enough to show activity reacting to the FEDS increases? Possibly? So I think the FEDS reaction function at this point becomes a combination of things. They have left some room in the language where they say we are conscious of the long and variable legs, but we are also reacting to the data as it comes in. So that allows them to say a higher inflation print, for instance, does not automatically lock in seventy five basis points and vice versa. A lower inflation print should not lead the market to interpret this idea that maybe they're going to do nothing or they'll immediately switch to five basis points. So what would happen in that scenario if the NBER came out somewhere in all of this and said the economy is in recession. It seems like J. Powe is preparing us for this idea that they're going to keep pushing ahead. I thought it was interesting. He talked again about how they think about risk management, and he sounded much more concerned about this idea that they may take their foot off the breaks of the economy here and then inflation shoots back up, and then you're in a bad position. The inflation expectations may have become unanchored at that point, and it becomes a lot more difficult to get inflation back where it needs to be. All the other hand, he said, we have the tools to address a market downturn if we go there. He seems to be suggesting that his tools work a lot better for an overshoot on the upside with the policy rate than an undershoot that is doing too little well. He acknowledged the FED could be done with hikes before inflation hits two percent? What data points do you think would allow them the leeway to be done? And I think the key thing Nick Timorrose over at the Wall Street Journal brought this up. A very simple way to think about Taylor rules is just is the policy rate above some forward looking measure of inflation expectations. So when you see the policy rates sort of comfortably above where we think inflation is heading, then that will probably think that it has the dial set just right. How concerning was that the FED chair thinks the path to a soft landing is narrowing? Yeah, I mean you've got to think that that's just an acknowledgement of reality. Right, So the median expectation among economists survey by Bloomberger is that there's something like a sixty percent chance that the economy goes into a recession in the next twelve months. I think that economists generally get flak for their misrate and predicting recessions, but I'd like to remind people they're usually wrong. Insofar as they fail to predict recessions. They very very rarely call a recession that does not occur, Chilling, Jonathan Chilling sufficiently restrictive. Are we definitely talking about something with a five handle? Now? Yeah, I think that's clearly the case. And I think that that's pretty consistent with the framework that we talked about earlier, whereby, in a very basic understanding of how Taylor rules work, you want to see the policy rate above inflation. I think a slightly more elegant way of thinking about the same thing is to say, again, not where is inflation right now, but where is inflation heading? And are you going to see that policy rate cross that path of inflation at some point? That's obviously moving target, but the Fed is hoping to hit it. It was interesting to see the market reaction because clearly not everything the Fed chair said was priced in. We did see a sell off inequities. We also saw yields on the two year rising. What have the market not priced in for the two years? It's fairly understandable, right, we're now pricing in something perhaps a lot closer to five percent, maybe five and a quarter, maybe even a little higher than there. But it's not a huge change in expectations. Right. On the other hand, I think it's really hard to make the argument that stocks were well priced heading into this, I think a lot of people could have made a reasonable argument that bonds were maybe not cheap, but fairly priced. Box. On the other hand, I mean, man, you've really seen equity risk premiums come in quite a bit in this little rally recently, and as we get past earning season, which you know, in sort of a strange way, has been a little bit of a tailwind for equity, is it really seems like you're going to see some of that deflate again. You've actually written about the past with off landing running through earnings, so I guess you have that to look forward to. Yes, yes, indeed. So the point of my recent column is that C suite executives seem to be doing a rather elegant job, not unlike J. Pal himself, in slowly, slowly guiding expectations down into a sort of recessionary mind frame. And in a sense, if you're J. Pale, that's exactly what you want to see. You're really really trying to avoid this cascade of negative sentiment that could itself catalyze a recession. In this environment, you want to see as at prices slowly come down, but you really want to avoid that financial accident. Um Opinions, Jonathan live In More Next on Lumber Opinion, I'm Vonny Quinn. Well, the mid terms are finally upon us. Can't love your country only when you win. Democracy is on the ballot this year. I sup with Bloomberg Opinions Jonathan Bernstein to get the state of play just a few days out. Jonathan, let's start with the Senate. Obviously, polls changing by the day, by the hour, but it looks a lot closer than it did just a couple of weeks ago. Well, it's look close the whole time. It was sort of close with a little tilt of the the Democrats six weeks ago. Six weeks before that, it was close with little tilts of the Republicans. Now it looks like we just don't know. And it's seat by seat. There's several seats that could go either way, and so we can't even say, ah, well, if Pennsylvania goes to the Republicans, then we don't know the answer. There's about five or so seats that are still up for grabs, which means that even though it's sort of a dead heat in terms of what the polls say about who will have the majority. We still could have fifty three Republicans. We could still have fifty two Democrats, three Democrats. Even there's a lot of uncertainty. We just have to wait. Now. Do we know yet what voters are going to vote upon? Oh? I think that it looks more or less like what we thought from the beginning, which is that it's going to be a good year for Republicans because there's a Democrat in the White House. In mid terms, the normal reaction is to vote against the party that has the presidency, and in particular, if the president is unpopular, which Biden remains, then that puts the Democrats even farther behind the eight ball. Part of that has to do with the economy. People have a perception the economy is terrible. If you look sort of at the formula for what's supposed to happen, if we have a president at around approval, you would expect the Republicans to win a large number of House seats and certainly take at least the one seat they need to get the Senate majority. It looks right now possible that Republicans will get the sort of forty to forty five seats that the fundamentals would predict, but more likely they're going to fall short of that, and they could fall quite a bit short of it. So why is that happening? I think it still seems likely that abortion is the thing that's driving Democrats to have only a bad year instead of a terrible year. We have to wait and see just how many young people and suburban women come out and vote as well. We don't know what those are exactly. Pennsylvania, it's an interesting Senate race. Probably at this point it's just a question of you know, they all have their turnout machines working their best to get voters to the polls in the last minute, and they'll do their best at that. You know, every candidate who has a decent chance is advertising now, whether it's directly or through support from one of the party committees or from a superpack or something like that. So that tends to sort of cancel each other out. And yet President Biden is dumping their old day Saturday along with Barack Obama. Don't fall from that, okay, dope, And Donald Trump is also going to be in the state. They're obviously putting a lot of time and effort into Pennsylvania. Will it be a disaster for the party that doesn't win. Pennsylvania matters a lot because it has both a very contested Senate seat and also has very contested gatorial seat. It's true, on the one hand, we don't expect the last minute campaigning to shift vote very much, but that's because both parties do the last minute campaigning. If only Republicans campaigned in Pennsylvania over the last forty eight hours, then perhaps that would help them a lot. But it's sort of a zero sum game because both parties go full out, and they both go full out in all of the relevant districts, whether it's seats that originally leaned one way or the other. At this point they know which close races are and all of those are going to be fully funded and have surrogates and have all the other resources that a party can put into it. And that's why the last minute stuff sort of canceled each other out because there's so much of it on both sides. Michigan is a fascinating I mean, there's so many fascinating ones, but Michigan is particularly fascinating guests because a it's so close and be yours enough of Liz Cheney endorsing Elisa's Latin. Does that make a difference? You know, I think that there's very few endorsements that make a big difference in the end. Liz Cheney also endorsed the Democrat in the Ohio Senate race. The only endorsed that I've seen that might move a few votes because it was so unexpected is in Oklahoma, where there's a surprisingly competitive race. Former Republican and Sooner football star J. C. Watts has endorsed the Democratic candidate for governor in what's expected to be a surprisingly close race. So maybe because that was sort of unexpected and you know, it would make some difference. But the truth is in a Michigan House race, in Ohio Senate race, people who would be listening to Liz Cheney have already made up their minds long ago. Yeah, that's such a good point. Georgia, does it go to a runoff? My bet and I don't bet on politics and bet on horses. Um, I would guess that Georgia certainly seems like it's headed for a runoff. And that's very interesting because just as we had two years ago, it's very possible that control of the Senate could come down to a runoff in Georgia, and even if it doesn't, one would suspect that, you know, it could change the race in all kinds of different ways to have it coming once the rest of the Senate is already set, assuming that it is, it could take weeks to decide some of these races. Well, that's the other question. I mean, Nevada is also both candidates polling identically now, so whoever comes into the runoff with the lead traditionally has having advantage, especially if it's a challenger. But whether that's true in a situation where you know, all of a sudden, the race would be even more nationalized than it is, especially if we know the control of the Senate is at stake. What are your thoughts, Jonathan on whether the polls button is hit after Tuesday night and we have to wait many days, many weeks for many of the outcomes. Yeah, I think that's how the system is set up, and we should all be very aware of it, depending on which state it is. Even sometimes within the state it takes longer to do the votes for sometimes for very good reasons. You know, in some states they accept ballots that are postmarked by election day well, that takes some time. In Pennsylvania. Notoriously, the Republican legislature is not allowed pre opening and pre preparing ballots that come in. The absolutely ballots to be ready to be counted in advance, and so that means that they have to start sorting them in all that, which takes time, not until after the polls closed, which means we won't find out about Pennsylvania right away. And this is in the normal proceedings. Do you imagine that there will be people contesting results and that there might be you know, sort of election denial going on again, it seems likely. I think Bloomberg comes something like two sixty five Republican candidates who are supporting the false idea that election was decided by fraud. Presumably some of them are going to yell fraud if they lose, even if they lose by quite a bit. We saw that the primaries. We saw some Republican candidates lose Republican primaries in Republican states and still refused to conceive. And it used to be you needed something, some kind of irregularity, something that looked funny at least, And now that's not true. They are ready to say then because Donald Trump pioneered this, that normal regular accounting procedures must have been fraudulent if you lose. And we also should be careful because we're also going to see from both sides legitimate election challenges because that happens also not because of terrible fraud or anything like that, but because sometimes there are things that the parties can legitimately claim went wrong and they can go to court and try to determine it. And one of the things for us as observers to do is to make sure we can say, oh, yes, that's normal, going to court the way you do it normally, But then others are, wow, this is something that is really a threat to democracy. What happens, Jonathan, If Republicans have their best case scenario, what do they get to do for the next two years? You know, it's a great question. Republicans are post policy party. They have been running, for example, on inflation. They don't have a policy agenda on inflation. They've been running on crime, which is mostly a state and local issue anyway, but a lot of federal candidates have been running a crime They don't have an agenda on crime. Their main agenda on crime appears to be if you look at their commercials and their rhetoric that they are against defunding the police forces. But Democrats, except for a handful of them, aren't for defundings. In fact, Democrats at the congressional level have sent tons of money to local police forces in the last two years. So you know, exactly what Republicans would do differently is very hard to tell. The main things we have to worry about are that Republicans would take anti democratic measures and would promote chaos. So you know, we have to worry about the possibility of a government default over the debt limit. We have to worry about a shutdown once it's time to pass new appropriations bills, so that kind of thing we have to worry about. We have to worry about the possibility they're going to start impeaching the president, the vice president, cabinet members over nothing, So that's a concern. Other than that, you know, the parties have proved time and again that they are capable sometimes of getting a lot done during divided government, but this Republican Party, I'm not so sure, doesn't seem very likely. Do we need to be worried about violence at all? Jonathan, you know, you hope not. You also hope that police forces, that the FBI are working on it. There was a warning earlier about the possibility domestic terrorism. You know, we had the attack on Nanti Closi's house. Just recently, We've had other situations and we've seen, you know, some very inflammatory rhetoric coming almost not I wouldn't say exclusively from Republicans, but mainly from Republicans, and you know, we do have to worry about that, certainly after what we went through in the last General Action. Yeah, Jonathan, So that the day comes and the results start rolling in, or at least the early returns. What states are you watching most closely? Obviously you're watching all of them, I know that, But what once a you're mosting forward to watching. Well, I guess the thing that that I'll try to keep an eye on. In particular, in addition to majorities in Congress and the governor's is some of these lower profile races that could be very important, including the secretary of state races in states where we have some you know, election deniers um who have made some very extreme comments may have been nominated by Republicans and it's just not clear if we could guarantee free and fer elections going forward. So that's something that obviously is a little bit is quite a bit scary, I would say, and I'll be watching that in particular, Jonathan, when the history books are written eventually, do we look back at this period as a turning point? Do these mid terms change anything about the nature of politics and how it's conducted in the United States? You know, I think that we have to wait. You know, I've been listening a bunch of things that are quite frightening, and they are legitimately frightening. It's also possible that candidates can back off. It's possible that some of the candidates who have been saying the most extreme things once they're in office, um, may calm down and basically behave themselves as normal conservative politicians. Nothing wrong with conservative politicians, not a threat to democracy. It's the radicalism that is. And we don't know yet to what extent we could be fighting against radicalism at multiple state and local and federal levels, and to what extent that we'll just get republican policy, which you know, was normal, regular parts in politics again as opposed to sort of crazy parts in politics. But I guess it's it goes in psychos right, other than I We've had this throughout history where things get whipped up and suddenly there's a period of normalcy or quote unquote normalcy, and then suddenly there's a period of insanity again. It just it happens a lot. Well, if you look at the history of it, you know, violence in American policies is nothing new. You know, we had up through the Civil War slavery who was inherently violent. In the full century after the Civil War, we had a violent white supremacy aligned with a political party, the Southern Democrats, with the agreement from other Democrats and from Republicans in most cases to look the other way. And historians and political scientists looking at America through nineteen often say, we think of it as a democracy, but really was it, especially in parts of the country. Maybe somewhat in some parts and some whatnot in others. And we'll say, well, you know, American doxy really only dates back to the sixties. And then we had a wave of left wing violence in the late sixties and early seventies which was very destructive, a lot of people killed um and that did not have the sport of political party now this wave of violence very well may be alive with a political party, and that seems to be what the January System Commission is telling us about what happened on January six. We don't know yet how close the ties were, but ties between the Republican Party, the White House, Donald Trump, and some of these paramilitary groups and so you know, yeah, that's very scary, and we don't know how it would turn out. It's tempting to think, well, it's cyclical, we'll go through a bad phase and the end again like Captain in the early seventies. But we don't know that it could get worse. Numer opinions Jonathan Bernstein more next on Lumberg opinion. I'm Vonnie Quinn. Conventional wisdom would have it that voters or swayed at the ballot box, typically by economic issues more than anything else. Political science, however, says hold that thought research on past elections suggests that, at least when it comes to mid term elections, local issues and individual candidates have a bigger influence. Bloomberg Opinions. Stephen Mim, history professor at the University of Georgia, looked at the data. So Stephen received wisdom is that voters often vote their pocketbook. At this time, there is a question mark over how much role is going to impact turnout, and it seems to be changing by the day. But tell us a little bit about pocketbook issues and how much they actually impact mid terms. So pocketbook issues obviously play a huge role in presidential election, but in the mid terms their role has always been a bit more ambiguous in a long time ago, and by that I mean, you know, over a hundred years ago, if you had looked at mid terms and the economy and tried to figure out if there was a relationship between the president and party and his or hurt while it would have been his members in Congress, and whether they suffered in the mid terms, you would have seen a really clear connection at that time. And that has a lot to do with how Congress actually, at a hundred plus years ago played a much more instrumental and central role in formulating economic policy, to the point where the president actually did very little when it came to economics. And by the twentieth century you began to see something quite different evolve, and which, especially after the New Deal and FDR, the economy kind of becomes owned by the president, and Congress plays a kind of secondary and supporting role. So you have ended up in the twentieth century with it mattering less and less. Now that's what we now believe we know about midterm election. But I should add that political scientists have argued about this, and that in itself is a rather interesting story. But it's only recently that this has kind of come into focus. So obviously it's coming to focus again because people have more and more elections to analyze, Right, how do they analyze them? They to voters after they voted and asked them what they voted on. The voters tell the truth, tell us a little bit about the political science. So the political scientists who have studied this look at quote unquote objective economic data that are prevailing in a say, congressional district. In other words, unemployment rates, inflation is kind of a national trend, but but other economic data, and they try to figure out if if that's influencing how people vote, all other things being equal and all other things kind of being held stable. And you can do fairly sophisticated regression analysis where you can start to assess whether or not the economy seems to change the outcome in ways that are statistically significant. And for a long time in the nineteen sixties and nineteen seventies, there was a small cluster of statisticians and political scientists who are studying this, and they came to a conclusion that the economy definitely mattered in the internal elections. And then you know later and another political scientist's last name is Ericson, who's now Colombia, actually punched a huge hole in this consensus and pointed out that you actually started to really control for all variables, including how they had voted previously, because it's critical here that people start to change their vote to express their dissatisfaction with the economy. If you control for that, then the economy really peters to insignificance when it comes to mid term elections. That is so fascinating because let's talk about you know, absolutely and and so there are two models here that are kind of competing as to what a mid term election is. In the first, which is the old conventional wisdom, is it's like the opportunity for voters to pass judgment on the president and his party's handling of the economy, which then would translate to punishing potentially members of Congress or alternatively, you know, to reward the president and his party. And of course, what actually has all we has been the case, interestingly enough, is that the president's party almost always loses seats in the mid term, which no matter how well the economy is doing. So so that alone should give us a little bit of pause as to whether the economy is like the signal issue. And then if you start to think about specific midterns like Donald Trump and Keen well, his party lost seats in Congress, but the economy was doing quite well, you know, And so when you begin to do actual regression analyzes, it starts to seem the economy plays very little role in these local votes. The other thing that you have to wonder about is when candidates start campaigning on the economy because that's what they think their voters want to hear about it. Does this all mean that maybe voters don't actually want to hear so much about the economy. I think that's often times the case, insofar as voters recognize that their local representative or senator, probably in a larger scheme of things, has very little control all the economy. You know. Of course, we could argue the president really doesn't control of them. But that doesn't that doesn't seem to stop people from punishing presidents for for for presiding about economy. But I think that there's a tendency to assume that people are thinking about these things when in fact they may be thinking about other more local issues or cultural issues, what have you. For example, you mentioned Rob Wade and how that might factor into the election. Having said that, there's some evidence that Republicans and Democrats view different economic issues differently and act on them somewhat differently depending on what they believed to be the problem, which is itself interesting. You know, there were as Democrats to them be more sensitive about unemployment and Republicans are more sensitive about inflation exactly. I was just going to ask that, obviously, every midterm is special, but this midterm has the color of inflation all over it, because inflation is so right to be high right now, correct, And so there's always perhaps the exception that proves the rule, or just simply the exception to the norm, and we may see something where inflation actually does play a role. But again, the data up until now, over the last say, deventy years, would suggest that inflation has no impact on Senate races and only a negligible impact at best on House races. So why the difference between Senate and the House. I find it fascinating the political scientists have decided that voters actually look at their representative and think about what their representative can actually accomplish. Right, I think the question of the House and the Senate races is interesting. I guess one possibility is that House districts tend to be gerrymandered almost invariably. They tend to have a more extreme concentration of voters in one direction or the other, and thus might be more sensitive to economic fluctuation than the Senate races, which are statewide and thus but not jerryman. So that question of like how political parties react, it may be primed to overreact in certain highly gerryman districts. What about the market, So inflation is one thing. It obviously affects people's pocketbooks every time they go to the grocery store. But when the market tanks, does that have a similar impact on elections or does that have any impact? It does not seem to have any impact, Although I think that's probably that's a that's a more complicated question because stock ownership has become increasingly democratized in very recent history, like over the last thirty forty years. So it's possible that that could play a larger role now than it did, you know, back when only three of the American population on stock or something really quite low. So that's a really interesting point, and I don't know what the answer to that is. I do know that you know, they've done fairly steady analyzes of unemployment, you know, but of we're not actually confronting high unemployment right now, interestingly, so exact many of the economic indicators are in fact quite good, right and also obviously the president has engaged in certain actions to take things like gas prices down. You have to wonder how much that has an impact on how people think about inflation if their gaspel isn't as high as it was three, four or five months ago, right precisely. And so it's a very murky set of economic data anyway, it's certainly not unambiguously bad. It's actually in some cases pretty good, you know, And that's another issue that's kind of coming into play. But all of which is to say, given what we know about how little the economy plays in the terms. These races will buy and large probably be decided on other factors that might be cultural, or religious, or or even The most plausible explanation for why presidents suffer stepbacks and mid terms more generally is that there's a desire to curb the power of the president by kind of divid the government. That seems to be a fairly consistent theme that emerges from midterm election, So that might have something to do about the outcome whenever it comes more than the economy. For sure, the Federal Reserve every now and then it pops up as a political issue, and right you have to wonder if that's wise on the part of any candidate, or if it really has anything to do with how people think about the economy. It's a great question, and I think again it's much like a question of what the market is doing. So at any given time what the Federal Reserve is doing may affect people, but only a small number, namely those perhaps trying to buy a house for them. They may have very strong feelings about this, so whether that translates to electoral impact is probably a lot harder. This election should teach us a lot Steven Right. I imagine there are political scientists waiting for these mid terms to be over in order to input their data to their models. Absolutely no, I think that this one is kind of an interesting test case of what can happen. For example, when you have low unemployment but high inflation. You know that in itself is kind of an interesting paradoxical situation. What matters more so, well now soon University of Georgia history professor and Bloomberg Opinion columnist Stephen mim there. Please do contribute your assaults and opinions. We love to hear from you. Just email v Quinn at Bloomberg dot net and don't forget. 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