- Bob Elliott, CEO and CIO at Unlimited
- Pooja Sriram, VP: US Economics Research at Barclays Capital
- Jason Furman, Professor: Practice Economic Policy at Harvard Kennedy School
We analyze the markets and the latest rate move from the Federal Reserve with a close look at equities, bonds, and public policy. Bob Elliott, CEO and CIO at Unlimited, Pooja Sriram, VP at Barclays Capital, and Jason Furman, Professor at Harvard Kennedy School, offer their analysis.
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. Donald Trump and Carbala Harris planning dueling economic addresses. Trump speaking at Georgia tomorrow offering his plan to lower taxes for business owners, and Harris sanks you'll deliver a speech this week outlining her economic vision we get Lucky. This morning, we're joined by Jason Furman, the professor at the Harvard Kennedy School and former chair of the Council of Economic Advisors under President Barack Obama. Jason, welcome back to the program sir. It's been far too long before we get to the election race. Let's just talk about the states of the economy. So a lot of people are still talking about whether we can achieve a SELT lending. Do you think it has been achieved already?
I think we're close. But the next core PCE reading on a twelve month basis is going to be probably two point seven percent, So inflation isn't all the way there, but labor markets are loose enough. I think inflation is coming down, but there's still narrow perils on either side of reinflation and reception, but a broad path to a self lending in between those.
Paul takes one of the big risks, at least according to Ardie Ardenny, who is just on with us. You wrote this terrific, I bet in the Wall Street Journal, terrific writing. I want to start with just the lead sentence. The first modern presidential race between two candidates with undergraduate degrees and economics hasn't thrilled economists.
Why not, Jason?
You know, campaigns are never the place where you're going to completely thrill economists. But I think an awful lot is the odors want to hear incredibly simple solutions to things. Price gouging, stop Japanese investment in US steel mills, a whole new areas that are in tact like tips, and you know, none of these are ones that any economist would recommend, but you know, there's just quite a lot of pandering out there.
Well, but at this point some people would say, we always get this to some degree, right, I mean, we get pandering, we get promises that don't get fulfilled. You've been in the political sphere before. How different is this time?
You know?
It feels a bit different. There's things I like in these campaigns too, especially an awful lot I like in the Harris campaign. So I don't want to say it's all negative. It feels like more because there's more things around limiting trade and controlling prices. A certain type of government intervention as opposed to the standard you promising lots of tax cuts or spending increases is more than normal thing. This feels to me, the more interventionists, more getting in the way of markets right after they've actually been really quite successful.
And Jason, aren't they both doing this? I mean, Kamala Harris was talking about price gouging on the federal level, and then you have Donald Trump over the weekend talking about capping credit card interest rates. Aren't these both proposals price controls in the US economy.
Yeah, I mean Donald Trump doesn't seem to be the type of person that respects free markets, competition, and all the things that go into it. He believes very much in a strong government. When he was president the first time, he tried to direct investment this way and that. So yeah, I don't think he's a particularly free market gun.
Can you give us a sense of how you view if Donald Trump's not a free market guy, who is Kamala Harris?
You know, I'm looking forward to that speech of this week. I think we'll hear more about how she defines herself economically. To a first approximation, you could expect a continuation of the types of policies we saw in the bidenministration, but remember a very very different context. I thought the initial stimulus was too large, but that's not going to repeat itself. We're not going to have, hopefully knock on wood, another massive global pandemic that will create the conditions for something like that. So, you know, there have been some some whispers about being more pro business. She spent more time with CEOs than President Biden. Did you know, pro business has his pros and cons, But on balance, I think wouldn't be a bad direction to move just a little bit in the way of right.
Now, how different would we see a Kamala Harris as a president if we get a sweep versus gridlock in Washington.
You know, I'm not sure about the whole theory that gridlock is the most fiscally responsible outcome here. You know, with gridlock you're going to be able to extend an awful lot of the tax cuts. It's going to make it hard to enact deficit reduction. In the past, you've seen the parties make deals where one party gets extra defense spending in exchange for the other getting non defense spending. So the whole gridlock is good for the deficit thesis, I'm really not sure. I believe if you had a certain number of Democrats there the taxes you could raise that you couldn't raise in divided government, and that might result in a lower deficit than you'd otherwise have.
Jason, I want to finish where we begin. You begin by saying that economists don't like the kind of tariffs that either side are proposing, the kind of limits to trade that we're seeing proposed, and yet we've seen increasing threats to the supply chain we've seen increasing questions about national security issues raised by certain fissures, the breakdowns that we've seen. If we do get some of these gates, some of these tariffs which both sides are proposing, does that increase the risk of inflation or reignition of inflation a really material way next year.
Yeah.
Look on tariffs is a massive difference between these candidates. Donald Trump is calling for ten to twenty percent tariffs on everything coming into the United States. That's stuff that we're just not going to be making here, like ballpoint pens, that stuff coming from countries that are close allies like Australia. There's just no coherent theory around that, and it's just at a scale that dwarfs anything that you've seen done in the Biden administration or I think plasantly we'd be done in the Harris administration. So absolutely, you follow through on the Trump tariffs, you were going to get a burst of inflation and a real quandary for the FED because it'll both lower economic growth and raise inflation at the same time.
Jason, we've got to leave it there. We'll continue that conversation on the FED and the prospect maybe of rethinking Ray cuts with ray hikes in twenty twenty five. If that is the direction of travel, Jason Furman there at the Harvard Kennedy School, Let's turn back to the market. Secondly, futures right now up a quarter of one percent on then as that one hundred, looking ahead to a busy week of data and FED speak purchase ReRAM of Barclay saying the following, even the fifty basis point kind appears to have been a close call. The outcome bears the distinct footprints, imprints of a compromise with hawks, trading the fifty basis point cut in favor of hawkish messaging and a relatively high bar for the unemployment rate to warrant another aggressive cut. Pooja joins us now for more, Pooja, I just want to get to your growth outlook, and I just want to sit on your GDP outlook. Did you raise your GDP out look after getting that surprise move from the Fed last week?
We did.
We did good morning first of all, you know, and we did raise it by about ero point five percent ditch points for the end of Q four. So we're still penciling in two percent growth for the fourth quarter of this year, and then we've got a similar piece of growth in fact through the end of next year. Some of that was, of course, the easing and financial conditions that we've seen over the bar. You know, a couple of weeks we track the fed FCIG measure, which translates you know, financial conditions into the impulse for growth and it does suggest that growth could look better. So, yes, to your question, we have raised our GDP forecast modestly in the near horizon.
Yeah, how does that line up with your view on the Fed's next move and the moves through twenty twenty five.
Yeah, that's a good question.
So look, our own baseline is for two twenty five basis points cuts this year, so that's you know, broadly in line with the medium projection for twenty twenty four. For twenty twenty five, we've got three twenty five basis points cuts, so that's a total of seventy five as opposed to one hundred basis points cut that the FOMC medium has And that's really predicated on the view that you know, the economy is going to look pretty decent. We don't have the unemployment rates staying you know, at four point four percent, which is what the FOI s has We in fact do see it taking lower. So we do think that, you know, they could afford to slow the pace of rate cuts going into twenty twenty five.
Put you wrote something in your recent report that I thought was fascinating. Whatever was gained by the feds fifty basis point rate cut may have come at a significant cost. And you go on to say that it seems quite likely similar Wall Street Channel articles again to what we saw ahead of this latest fifty basis point rightcut during that blackout period coming up. Any blackout period will be interpreted as legitimate signals leading to unnecessary noise. This cost may well exceed whatever benefit the FED achieved by front loading one cut in our view, Can you just elaborate on how much this adds to potential uncertainty for you?
Yeah, I think that's a great point.
So, you know, just to take a step back and to recap what happened. You know, before the FED went into the blackout period, we had a bunch of data in hand.
I think the last print we had.
Was you know, the the non vampairo we heard from FMC officials, namely you know Waller FMC member Williams. And you know, the markets were essentially quite content to price in a twenty five basis points ratecut. That was our baseline as well. Everything looked good and then you know, as you mentioned, we've got a bunch of these articles and suddenly it raised the question and you know, put the possibility that the FED could perhaps you know, go a little more aggressive and go fifty basis points, and then you know, the pricing moved, and surprisingly, the FED actually ratified that movement market pricing. And we found that quite you know, quite surprising, to be honest, because it did not come on the back of data and in fact came on the back of a bunch of articles. And what this means is, if you know, something like if there's a precedent for this, now, it's quite possible that there's going to be a lot of noise and volatility around around the blackout period if we get more news information this way.
And in terms of the fact.
That the FED did not gain much is you know, the markets are still pricing in about the same amount of rate cuts as they work before the.
News articles came out. So it's not very clear.
To us what the FED achieved by by ratifying market expectations going this route.
This might sound like a dumb question, but what is the actual economic cost of of a little bit more volatility around the blackout period?
Well, I think it can.
It can get you know, markets to run away with the with the expectations. It's you know, you would think that the data, hard data on economic activity.
What you're officially hearing from.
The f O and C guides market expectations. But if you have you know, something like this, it can lead.
To a lot of volatility.
Market pricing could go different ways, and then if the FED outcome looks very different to how the markets have moved, it can create financial market volletin.
So I think that was the point that we were trying to make.
That it creates unnecessary noise, especially after an error where FED communication has been really on point and they've really made an effort to do this so.
Well, given this, do you think the FED now has a credibility problem?
That doesn't seem like it. When we think of monetary policy credibility, we do tend to look at inflation expectations, right. The credibility comes from the fact that how committed are they towards their dual mandate and right now, there's no question that they're very committed. You know, it does seem like the focus is a little bit more on the labor markets than it is on inflation, as it should be given the inflation outcomes are pretty good.
So I think it's too early.
To start questioning any of that, but it does create a bit of a kink in the communication policy PJ.
We've got to leave it there a free share to catch up.
With.
It's around of time. But to continue the conversation. Bob At of Unlimited bub good morning, and welcome to the program.
Good morning.
What did we achieve with the fifty paces point right cut last week at the Federal Reserve?
Well, I think the biggest thing that the Fed highlighted was that they were trying to paint the picture of a strong economy and sufficient disinflation that they can deliver big cuts relatively quickly into that scenario. Now you can argue whether you actually believe that that's true, but I think the path that they're laying out they're committed to, and they believe it's data driven because they believe that the inflation numbers are going to get back to their two percent mandate, and that's very interesting for markets. It might be too easy into a hot economy which got a lot of effects, second and third order effects that they might not expect. You believe in disinflation, No, probably not. I think the thing that's interesting you inflation is still running above the FEDS band aid. We have to remember that no matter how you slice it, and easy into that environment when you have a hot economy means that we're probably more likely to get acceleration rather than deceleration head The thing that's interesting about that is that the FED probably won't see that data come out until they've cut a few hundred basis points, and only then will they be held accountable for the fact that the disinflation might have reversed. And so I think it's a tricky period over the course of the next fifteen eighteen months when the FED isn't going to get the feedback loop that their policy is too easy.
Just to put a bow on that, are you saying that right now the risk of a reinflationary kind of moment is greater or less priced into a market and more real than say a downdraft and gross Well, certainly.
It's less priced into markets. When you look at long term inflation expectations, the expectation is for you for inflation to be at two percent or below two percent essentially forever. And given the geopolitical dynamics, given the FEDS easing into a relatively strong economy, given the fact that you start you still see a lot of sticky dynamics and inflation, particularly related to wages, which are showing some signs of reaccelerating. That whole picture doesn't really align with the probabilities of a certainty around two percent inflation and much more likely that we have higher inflation ahead rather than lower inflation.
Normally, somebody with that kind of view would be bullish, because if you believe in this sort of strong economy that could foster some reignition of inflation that would be probably positive for equity valuations. But you wrote the stock market is priced perfection, and so far this quarter is providing plenty of data points that the perfection is unlikely to be achieved in reality.
Why well, I think when you're trading markets, you got to trade against what the price and expectations are, and we're at pees that are almost as high as they were during the tech boom. We have forward earnings growth expectations in the mid teens. That's a pretty strong scenario already priced into the markets.
Now.
The FED is helping that along, and that's probably a positive. But I think the story is much more around being long stocks relative to bonds, because that's the scenario, you know, of the growth reacceleration that probably isn't fully priced into the market.
Let's introduce China into the conversation. They're now exploiting disinflation, perhaps even deflation. How do the factor into your world view right now?
Well, China's experiencing debt de leveraging, you know, akin to what happened in Japan, and akin to classic balance sheet recession, a classic balance sheet recession, and the policymakers there are maybe driven by motivations that are not related to macroeconomic policy, more like political motivations. And so for whatever reason, they're choosing not to respond to the situation. And so China's probably in this malaise for the foreseeable future. I think the effects on the West are actually relatively limited. And the reason why that is is, you know, China's deflationary impulse has been basically the same for the last couple of years. Probably China is not going to accelerate in terms of getting a deeper and deeper or a worse rate of deflation going on in the economy. And if anything, you've seen it tick up. And so the big picture is it's not it's probably not the main story that's going on. When you're looking at US inflation, Western inflation in general. What really matters. It's the labor markets. It's all about the labor markets. It's all about that wage data. If you look at the Atlanta Fed wage tracker data, we're one to two points above where we were pre COVID, And unless you believe productivity has matched that increase, that's an underlying inflationary pressure that remains in the economy.
But Bob, isn't the deflationary pressure coming from China has everything to do with the commodities market. Isn't that helping Western economies?
Yeah, it certainly is an effect on the commodities markets. And if you're trading you know, copper or other direct commodities that China has a meaningful share of, that's going to be an influence, a meaningful influence on that supply demand. But the flow through of that to the to the US inflation picture, it's pretty tiny compared to rents, labor, the other sort of imported you know, the other sort of important goods costs that you know, cars, new cars, used cars, all of those things represent a much bigger impact on US inflation and US policy.
Liz Young Thomas or guess at the top of the hours talking about one risk would be reacceleration of commodity prices. Do you see that where China is right now?
Commodity prices have basically been trading, you know, and particularly oil prices, which is really the thing that matters, have been trading in a tight range over the last couple of years. After the move down eighteen months ago. You know, I don't see meaningful pressures on the upside or the downside. On the downside, on the downside, you've got a natural cap in terms of you know, suppliers taking barrels off the market if oil prices start to fall a little too much. And on the upside, there's still a lot of incremental production. You know, US production is near all time highs. A lot of production that can come into the market to put a cap on it. So that's probably not the big story here. It's much more about the sticky inflationary pressures in the economy. On the forward looking basis.
How much would longer term yields have to rise to make you a buyer.
Well, I think at this point you know you've got to see inflation expectations move up considerably here, So I think you know easily into the into the mid forest before you start to have a real conversation that that's a that's an attractive bid, particularly relative to stocks in a stronger growth environment.
When you say inflation expectations, you're talking about markets based pricing. Are you talking about consumer surveys the likes we see from you, Mitch every other Friday.
But what you're looking for, mostly mostly in terms of trading the bond market, it's all about price and break even inflation. And so that that's the thing that if you look at the market's basically priced to be, you know, at two percent or below essentially forever or inflation swaps, that's what you're trading. And those are the those are the areas of the market that look particularly under price. And the reality is if you're going to trade, if you're gonna get exposure to duration right now, buy the tips all right. You're you're seeing real yields that are still pretty good on any long term perspective. You know, around one and a half to two percent. That's a pretty good real yield if you can lock it in for twenty or thirty years without any rest.
Bob, it's good to see you. Let's do it again soon. Thank you, sir, Bob Elliot. There are unlimited on this fun market. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business App.