This market is getting ahead of itself. Let's have that conversation right now with Mohammed al Aaron of Queen's College, Cambridge, with us in the studio here in New York City. Mohammed Gratz to catch up with you as well, Sir, Let's start with this. We're stuck on Wednesday. Never mind the fact that it's Tuesday. We're still talking about Wednesday. What happened in that news conference with jam and Powell last week?

This market is getting ahead of itself. Let's have that conversation right now with Mohammed al Aaron of Queen's College, Cambridge, with us in the studio here in New York City. Mohammed Gratz to catch up with you as well, Sir, Let's start with this. We're stuck on Wednesday. Never mind the fact that it's Tuesday. We're still talking about Wednesday. What happened in that news conference with jam and Powell last week?

Total confusion and the fact that you start a show on Tuesday talking about confusion from last Wednesday is an indication of how absurd this whole situation is. John, The whole point of FED communication is to do two things. One is to be transparent and two is to enhance the power of forward policy guidance. Instead, FED communication confuses people. Fed communication fuels moll has it, how often did you hear the FED put is back and it ewards the credibility. I think we have a real problem with fedmmunication, and the market is absolutely correct in trying to do two things. First in trying to bully the FED, because this FED seems to be willing to be bullied, and secondly, to get carried away with this notion that we the FED put us back.

Total confusion and the fact that you start a show on Tuesday talking about confusion from last Wednesday is an indication of how absurd this whole situation is. John, The whole point of FED communication is to do two things. One is to be transparent and two is to enhance the power of forward policy guidance. Instead, FED communication confuses people. Fed communication fuels moll has it, how often did you hear the FED put is back and it ewards the credibility. I think we have a real problem with fedmmunication, and the market is absolutely correct in trying to do two things. First in trying to bully the FED, because this FED seems to be willing to be bullied, and secondly, to get carried away with this notion that we the FED put us back.

Let's go back to the comments from shareman Powell in the news conference Mhammon and work through them together.

Let's go back to the comments from shareman Powell in the news conference Mhammon and work through them together.

Here's the quote.

Here's the quote.

The question of when it will become appropriate to begin dialing back the amount of policy restraint in place is clearly of dyslopic of discussion now for the world and also a discussion for us at our meeting today. Did you find that confusing or the comments we've had since then confusing?

The question of when it will become appropriate to begin dialing back the amount of policy restraint in place is clearly of dyslopic of discussion now for the world and also a discussion for us at our meeting today. Did you find that confusing or the comments we've had since then confusing?

Which one?

Which one?

So, like everybody else, I think you put more emphasis on share Pal's comments, and that's what the market has done.

So, like everybody else, I think you put more emphasis on share Pal's comments, and that's what the market has done.

If someone was with him.

If someone was with him.

That understood how the market would react, they would say to him, WHOA, be really careful because the way you're going to be heard may be different from how you want to be heard. You're going to be heard as opening the door wide open to a major rally in both fixed income and inequities.

That understood how the market would react, they would say to him, WHOA, be really careful because the way you're going to be heard may be different from how you want to be heard. You're going to be heard as opening the door wide open to a major rally in both fixed income and inequities.

You know, in the old days you.

You know, in the old days you.

Had people like Kevin Walsh who would be in touch with the markets, who understood how the FED would be heard, and who was a moderating voice in terms of let's ask the question, not what we want to say but how will we be heard. We don't have that and join this other confusion. You have now two qrong communication reaction. One is to walk back what he said, and the other one is to explain what he said. Right, you can't do both at the same time. You've got to decide are we walking it back? Are we explaining it now? We're getting both.

Had people like Kevin Walsh who would be in touch with the markets, who understood how the FED would be heard, and who was a moderating voice in terms of let's ask the question, not what we want to say but how will we be heard. We don't have that and join this other confusion. You have now two qrong communication reaction. One is to walk back what he said, and the other one is to explain what he said. Right, you can't do both at the same time. You've got to decide are we walking it back? Are we explaining it now? We're getting both.

So we've had funy of pushback, not just from FED officials but from paper writing columns, including yourself.

So we've had funy of pushback, not just from FED officials but from paper writing columns, including yourself.

Muhammed.

Muhammed.

Bill Dudley, formerly your FED president, said this was a big gamble, this apparent pivot. You've said the market shouldn't be being bullied, or rather, the market shouldn't bully the Fed. Now, can you explain to me just that headline on the market bullying the Fed?

Bill Dudley, formerly your FED president, said this was a big gamble, this apparent pivot. You've said the market shouldn't be being bullied, or rather, the market shouldn't bully the Fed. Now, can you explain to me just that headline on the market bullying the Fed?

How is the market bullying the Fed?

How is the market bullying the Fed?

So what the market has done and we saw it in January of twenty nineteen, we saw it happen, in April of twenty twenty, we saw it happened in November of twenty twenty one, is that every time the FED goes towards the market, because there's a decoupling, the market runs a way further from the Fed, and the market has understood that it can drag the FED along, and that's got to stop, John, because we get overshoots, and then we've got to pay for the consequences of those overshoots.

So what the market has done and we saw it in January of twenty nineteen, we saw it happen, in April of twenty twenty, we saw it happened in November of twenty twenty one, is that every time the FED goes towards the market, because there's a decoupling, the market runs a way further from the Fed, and the market has understood that it can drag the FED along, and that's got to stop, John, because we get overshoots, and then we've got to pay for the consequences of those overshoots.

Later on, in the piece of the Financial Times that you wrote earlier this way, there was a quote at the very top of the article. It read as follows, it turns out that inflation was transitory after all. That's some of the language being used out there at the moment. Muhammad, Why is that the wrong conclusion?

Later on, in the piece of the Financial Times that you wrote earlier this way, there was a quote at the very top of the article. It read as follows, it turns out that inflation was transitory after all. That's some of the language being used out there at the moment. Muhammad, Why is that the wrong conclusion?

Yeah, so I used that quote and then push back on it immediately, saying, not only is it analytically incorrect, but it is dangerous. Why is it analytically incorrect? A transitory phenomenon is temporary, it is reversible, and therefore you look through it, you don't change your behavior. Massive behavioral changes have resulted over the last few years from inflation that was too high, starting from the FED itself having to tighten. But we've seen also the banking issues, We've seen what's happening to commercial real estate. There has been major changes. So to call inflation transitory after all is to ignore that the landscape has changed because of inflation. It's also dangerous, John because it opens the door to this notion that we're going back to a wag structure that is very artificial.

Yeah, so I used that quote and then push back on it immediately, saying, not only is it analytically incorrect, but it is dangerous. Why is it analytically incorrect? A transitory phenomenon is temporary, it is reversible, and therefore you look through it, you don't change your behavior. Massive behavioral changes have resulted over the last few years from inflation that was too high, starting from the FED itself having to tighten. But we've seen also the banking issues, We've seen what's happening to commercial real estate. There has been major changes. So to call inflation transitory after all is to ignore that the landscape has changed because of inflation. It's also dangerous, John because it opens the door to this notion that we're going back to a wag structure that is very artificial.

We're not.

We're not.

We're going to settle at a higher average level of yields than we did after the Global financial crisis, and we shouldn't fuel this notion that we're going back to what followed the global financial crisis. We are living in a world of inflexible supply side. What's happening in the Red Sea is another illustration of that, and we've got to recognize that we're no longer in a world of insufficient demand, in a world of insufficient supply.

We're going to settle at a higher average level of yields than we did after the Global financial crisis, and we shouldn't fuel this notion that we're going back to what followed the global financial crisis. We are living in a world of inflexible supply side. What's happening in the Red Sea is another illustration of that, and we've got to recognize that we're no longer in a world of insufficient demand, in a world of insufficient supply.

We'll get to the Red Sea and the so it's can out a little bit later in the hour. Let's just pick out one part of the economy, Mohammad, together, let's go to the labor market. Haven't we learned from this cycle so far that this labor market, the characteristics of it, aren't a threat to price pressure.

We'll get to the Red Sea and the so it's can out a little bit later in the hour. Let's just pick out one part of the economy, Mohammad, together, let's go to the labor market. Haven't we learned from this cycle so far that this labor market, the characteristics of it, aren't a threat to price pressure.

Yes, because the supply site has been responding. It took time, but it's lovely to see people going back into the labor force. Having said that, John, we're still in the middle innings of the labor market. So let's wait and see how that evolves. But the good news, and we should all be encouraging this, is that more people have entered the labor force.

Yes, because the supply site has been responding. It took time, but it's lovely to see people going back into the labor force. Having said that, John, we're still in the middle innings of the labor market. So let's wait and see how that evolves. But the good news, and we should all be encouraging this, is that more people have entered the labor force.

You think it's wrong to assume that supply site led improvement rebalancing we've seen won't continue.

You think it's wrong to assume that supply site led improvement rebalancing we've seen won't continue.

I think there's a real question about skill mismatches. There's a real question about how far you can increase labor force participation. My hope is that it will continue, but you need to wait and see.

I think there's a real question about skill mismatches. There's a real question about how far you can increase labor force participation. My hope is that it will continue, but you need to wait and see.

So we've had massive eating financial markets financial conditions over the last months, both inequities, credit and also in the bond market as well. Yields aggressively lower. What's the price we're going to pay for that? Do you think the most we've seen in just the last two months?

So we've had massive eating financial markets financial conditions over the last months, both inequities, credit and also in the bond market as well. Yields aggressively lower. What's the price we're going to pay for that? Do you think the most we've seen in just the last two months?

Yeah? I mean, And first, the easing has been historic.

Yeah? I mean, And first, the easing has been historic.

Lisa put out a tweet before chair Pal turbocharger this whole thing, showing that financial conditions were looser today than they were when the Fed started hiking, and then they've loosen significantly since then because of the way the market interpreted what Chair Pow has said.

Lisa put out a tweet before chair Pal turbocharger this whole thing, showing that financial conditions were looser today than they were when the Fed started hiking, and then they've loosen significantly since then because of the way the market interpreted what Chair Pow has said.

What's the risk? John?

What's the risk? John?

The risk is that they're loosening too quickly and too much, and that in itself will mean that the last mile of the inflation battle was complicated to begin with, gets even more complicated.

The risk is that they're loosening too quickly and too much, and that in itself will mean that the last mile of the inflation battle was complicated to begin with, gets even more complicated.

Why does it have to be complicated? We've heard from many people who think maybe the half work is behind us. Jan Haasis Goldman Sachs talked about that and his outlooked for twenty twenty four, and I guess I think we're hearing that from FED officials as well. Yeah, I have this last month doesn't have to be that difficult, Secretary Yellow, even when you know as well, why do you disagree with them?

Why does it have to be complicated? We've heard from many people who think maybe the half work is behind us. Jan Haasis Goldman Sachs talked about that and his outlooked for twenty twenty four, and I guess I think we're hearing that from FED officials as well. Yeah, I have this last month doesn't have to be that difficult, Secretary Yellow, even when you know as well, why do you disagree with them?

So, first of all, it depends how you define the last mile. If you define the last mile, how I'd like them to define the last mile, which is de facto or implicitly target a high inflation rate. It doesn't need to be difficult. And if that's what they're thinking, is I very much applaud that because there's no need to sacrifice the real economy in order to get to an inflation target that's not suited for the world we live in today. So if that's the interpretation, then I'm with them. It doesn't need to be complicated, it doesn't need to create damage. If the interpretation is we're going to get to two percent without causing problems. I just don't see it. Look at the inflation dynamic, look at what's happening. You would need service this inflation to massively accelerate because outright goods deflation is going to stop at some point, and it's very difficult to get service inflation down using interest rate policy alone.

So, first of all, it depends how you define the last mile. If you define the last mile, how I'd like them to define the last mile, which is de facto or implicitly target a high inflation rate. It doesn't need to be difficult. And if that's what they're thinking, is I very much applaud that because there's no need to sacrifice the real economy in order to get to an inflation target that's not suited for the world we live in today. So if that's the interpretation, then I'm with them. It doesn't need to be complicated, it doesn't need to create damage. If the interpretation is we're going to get to two percent without causing problems. I just don't see it. Look at the inflation dynamic, look at what's happening. You would need service this inflation to massively accelerate because outright goods deflation is going to stop at some point, and it's very difficult to get service inflation down using interest rate policy alone.

So do you get the sense this FED is accepting two points something for inflation and not two point zero.

So do you get the sense this FED is accepting two points something for inflation and not two point zero.

I think they're heading that way, John, Yes, I do. I think they're heading their weight. They're never going to say it, but I think they're recognizing and the new emphasis you're starting to hear, and you heard it today from very Daily, the president of San Francisco FED, saying basically, we don't need to sacrifice the real side of the economy.

I think they're heading that way, John, Yes, I do. I think they're heading their weight. They're never going to say it, but I think they're recognizing and the new emphasis you're starting to hear, and you heard it today from very Daily, the president of San Francisco FED, saying basically, we don't need to sacrifice the real side of the economy.

Mohamed, Let's build on that just a little bit. Yeah. I think it's a massive home bus right now in the United States. Growth is okay, inflation is coming down, rake cut seemingly are just around the corner. Why wouldn't you stay here? Why would you go abroad right now?

Mohamed, Let's build on that just a little bit. Yeah. I think it's a massive home bus right now in the United States. Growth is okay, inflation is coming down, rake cut seemingly are just around the corner. Why wouldn't you stay here? Why would you go abroad right now?

Because there's more value abroad.

Because there's more value abroad.

You've seen this in local currency in them. The acid class has been abandoned by quite a few investors. As I mentioned speaking to Monica, it continues to suffer outflaws when other acid classes have SOFTAED influence. I mean, we say we call it the every thing rally, and EM has rallied, but it hasn't changed the technical dynamics. So I find it quite interesting. There's a lot of conversation going on. Is its structurally damage? Is it the way EM is managed? But if you compare like for like, there's a valuation advantage that it isn't being exploited enough in them.

You've seen this in local currency in them. The acid class has been abandoned by quite a few investors. As I mentioned speaking to Monica, it continues to suffer outflaws when other acid classes have SOFTAED influence. I mean, we say we call it the every thing rally, and EM has rallied, but it hasn't changed the technical dynamics. So I find it quite interesting. There's a lot of conversation going on. Is its structurally damage? Is it the way EM is managed? But if you compare like for like, there's a valuation advantage that it isn't being exploited enough in them.

We'll see if ray cuts are a catalyst to change a change of attitudes towards emerging markets in the year to come up. Let's build on that just a little bit, YM. I think it's a massive home bus right now here in the United States. Growth is okay, inflation's coming down. Raycuts seemingly are just around the corner. Why wouldn't you stay here? Why would you go abroad right now?

We'll see if ray cuts are a catalyst to change a change of attitudes towards emerging markets in the year to come up. Let's build on that just a little bit, YM. I think it's a massive home bus right now here in the United States. Growth is okay, inflation's coming down. Raycuts seemingly are just around the corner. Why wouldn't you stay here? Why would you go abroad right now?

Because there's more value abroad.

Because there's more value abroad.

You've seen this in local currency in EM. The acid class has been abandoned by quite a few investors. As I mentioned speaking to Monika, it continues to suffer outflaws when other acid classes have softened influence. I mean we say we call it the every thing rally and EM has rallied, but it hasn't changed the technical dynamics. So I find it quite interesting. There's a lot of conversation going on. Is it' structurally damage? Is it the way EM is managed? But if you compare like for like, there's a valuation advantage that isn't being exploited enough in the EM.

You've seen this in local currency in EM. The acid class has been abandoned by quite a few investors. As I mentioned speaking to Monika, it continues to suffer outflaws when other acid classes have softened influence. I mean we say we call it the every thing rally and EM has rallied, but it hasn't changed the technical dynamics. So I find it quite interesting. There's a lot of conversation going on. Is it' structurally damage? Is it the way EM is managed? But if you compare like for like, there's a valuation advantage that isn't being exploited enough in the EM.

We'll save ray cuts or a canalyst to change a change of attitudes towards emerging markets in the year to come. Just a final word with Mohammed Aera Muhammed looking back on twenty three, looking ahead to twenty twenty four. One big last thing for you, what's the big risk for next year from your perspective?

We'll save ray cuts or a canalyst to change a change of attitudes towards emerging markets in the year to come. Just a final word with Mohammed Aera Muhammed looking back on twenty three, looking ahead to twenty twenty four. One big last thing for you, what's the big risk for next year from your perspective?

I think it's both a risk and an opportunity, which is volatility that causes more dispersion. You know, John, we've banked early the major supportive top town factor, and that is that the FED will pivot to loosening and considerable loosening.

I think it's both a risk and an opportunity, which is volatility that causes more dispersion. You know, John, we've banked early the major supportive top town factor, and that is that the FED will pivot to loosening and considerable loosening.

Well, we've banked that.

Well, we've banked that.

That is what's pushing us and what continues to push us for a while. What next, It's not going to be a top down factor. It's going to be bottom up, so more volatility and more dispersion.

That is what's pushing us and what continues to push us for a while. What next, It's not going to be a top down factor. It's going to be bottom up, so more volatility and more dispersion.

Mohammed, thank you for today and for the whole of twenty twenty three. Thank you, sir,

Mohammed, thank you for today and for the whole of twenty twenty three. Thank you, sir,