Welcome to the Internal Revenue Service. You can also visit us that wu wu W dot i RS. Don't guard Hello, and don't worry. You haven't just called the inn Revenue Service. You're listening to Stephanomics, the podcast that brings the global economy to you. But if you were trying to get through to the hard working folks who helped to collect America's taxes, you'd have a long time to wait. Keep listening to hear about the extreme lengths that American taxpayers and accountants are going to get through to the i R S. First, though, I wanted to play you part of a webinar we held this week featuring the latest insights on the road ahead for the US economy, China, and the US Central Bank, featuring some of the brightest minds of Bloomberg Economics. It started naturally enough with a great introduction by me. There does seem to be an unusually wide gap right now between where we are and where economists expect us to end up in a year or two time. I mean, the leading assumption when you look at the forecast for twenty three or four is that we're kind of heading back to normal in the global economy by by that time, probably by midy three. And that's fine, that's a traditional assumption that economists makes, sort of reversion to the mean. But you look around you and you think, wow, we're an awfully long way away from normal right now. You know, we've got a large chunk of the workforce isolating at home, maybe due to omicron. We have energy bills soaring in large parts of Europe, and for many American households, millions of workers missing from the labor market supply chain, still in a in a very troubled state. I mean, it all seems very out of whack. So, although it's probably always the case that economists are better at telling you where you're going to end up than how you're going to get there, I think this year that path from a to be from now to normal seems particularly hazardous and uncertain, and I think the potential role of central banks in that also feels particularly challenging. So I'm especially glad that we're focusing today on the downside and upside risks that we're seeing in the global economy. Um, and I'm also very glad that we're going to spend a bit of extra time talking about how the US Central Bank is positioned for this year with one of the former leaders of the Federal Reserve, the former Federals New York Federals President Bill Dudley. So that's all to come, but first I think we should set the scene with our chief US Economist, Anna Wall and how things looking, Thank you, Stephanie. So a big question heading into this year for US is when will the Fed begin to raise rates? And a March rate hike had looked uncertain when we were just entering into this year because omicron has swept through the US like wildfire and cost widespread workers absentaism. There were lots of anecdotes of temporary business closures. So we developed a daily GDP tracker to allow us to better track the disruption of Omicron, and it had pointed to a big plunge in activity in the first week of this year, and using this daily activity index as a tool, we forecast out what GDP would look like at the end of the quarter, and the model forecast the recovery would be in full swing by March and in a reassuring sign, indeed, our daily trecker is already showing signs of improvement in the second week of this year, So this is why we now believe that a March rate hike is in the cards. So then the next question is how many hikes will there be this year, and the FED future market currently expect four hikes, but that forecast is contingent on inflation and unemployment rate evolving as we have written down, and our baseline currently is for inflation to peak in February at seven point two and thereafter we expect it will slow to an average of three. In the labor market, we expect it to continue to show signs of being very tight. Wage growth is now at the highest in the early nineties. There's one point six open jobs for every unemployed person out there UM, and we project unemployment rate to fall to three point five percent or lower by the end of the second quarter. But let me emphasize that our forecast for the inflation is subject to a lot of uncertainty, and we see two non trivial risks in the near term that could push it much higher. So first, um, with China hosting the Winter Olympics in early February and for the s time really open its borders to international visitors, there could be a risk that Amochron will infiltrate into China and with their zero COVID policy, this could um disrupt the production there and re intensify supply chains. And the second risk is that there is a risk of port strikes in June of this year and the along the ports along the West Coast in US as the contract expires between the port workers longshoremen and the ports. So overall we think that the risk are on the upside for more hikes in store than what the market currently expects. But for this year and next year, thank you, Anna, there's a lot there. But I'm interested in what you said about wage growth picking up and also the potential for us to hear from from some union activity or at least in the sort of crucial deal at the ports. And I think power workers have also got potentially a dispute coming down the track. I mean, are we are we going to see a very different kind of US labor market this year than we've seen in recent years? Or is this with more with workers actually um able to extract real wage increases, or is this really just about trying to catch up with with the very high level of inflation. I think that when the labor market is tight as you you're we are seeing right now, as I was saying, one point six open jobs for every unemployed person out there. Just the threat of um you know, your workers quitting. It's that latent threat there that can cause um um employers to raise the wage and you know, submit to request of the workers. And when it comes to the port workers in historically, whenever there's uh where where the port workers are up for renegotiating their UM wages, there has been significant slow down in ports. It happened in, It happened in and at a time when these port workers had been asked to work twenty four hours per day by the by the Biden administration. I think they're fed up, and uh so, the likelihood of that is high. But but back to the you know, to to the your question, I do think that the labor market now is different than what we have seen in the last ten years, just because um there's just just this latent threat of quitting, quitting, which gives a lot of bargaining powers to workers. Those missing workers. We have that the several million workers who as far as we could tell, we were in jobs before COVID struck and maybe lost their jobs during the recession but have not gone back. Is there any sign of of some of those coming back into the picture? Yeah? So you had a estimated how much workers have in their bank by income destiles, and our expectation is that um, the workers which are in shortage there their savings give them enough about to two months of runway to cover their spending. And UM, we were expecting that there would be a flood of labor supply starting this year because of that estimate. And I do see signs of the labor market loosening, but that is right before omicron hit. Okay, so we've got a good picture on the state of the economy and as far as we can see it, and we can see a bit better with those high frequency indicators. But clearly there's the center of a lot of the debate, and certainly what financial markets are focused on is what's the Fed gonna do? Is it going to do too much or too little UM this year? Having now resolved to raise interest rates UM several times in two And it's great to have a versation with Bill Dudley about these things, former chief economists for Goldman Sex and former President of the New York Federal Reserve now a senior adviser to Bloomberg Economics and Bloomberg Opinion columnists. Um, Bill, if we just stepped back briefly, I mean, there's a lot to talk about. But if we think about the FEDS handling of the past two years of the pandemic, did they win the war but lose the piece? You have a lot of people in the peanut gallery now critiquing their view all through last year that inflation was going to be transitory. I think Muhammad al Arian has called it probably the worst inflation call in the history of the Federal Reserve, wasn't it. Well. I think they did a great job at the early stages of the pandemic in terms of their interventions to restore market function. Uh, these financial conditions push into tras to zero. So I give them, you know, a plus, you know, back in March two thousand, twenty April two thy But since then, I think they've made a number of errors. And some of the errors are related to how they implement monetary policy, and some the ears are just bad forecasting. On the monterary policy implementation side, they operationalize their two percent average inflation target regime by essentially tying their hands and saying we cannot lift off, we cannot raise short term rates until three conditions are satisfied. Inflation at two expected to be above two percent for some time in the future, and we've also have to achieve our estimate of maximum sustainable employment. So what that meant was the FED was gonna have policy extremely easy even as the economy reach full employment, so be a big gap between where the FED needed to be versus where the FED was completely self induced er on their part. The second thing that was self induces they were so worried about a taper tantrum that they were very slow to actually taper the rate of asset purchases. So we've ended up in this odd situation today where everyone's talking about FED tightening, but the FED even as we speak, is still buying assets adding accommodation. The other two areas they made I think our heart heart, you know, I would give them less grief about because they were forecasting errors. The first forecasting error, which was significant, was that the inflation shock turned out to be much bigger and lasted much longer than they were anticipating. Nobody was expecting at the beginning of two thousand, uh and and and twenty that we were going to see seven percent CPI inflation by the end of one and so that was a surprise to them. The supply chain disruption just lasted longer than they expected. The second surprise, and it wasn't all completely a bad surprise, is that the labor market tightened much faster than they expected. UH. As you went through and twenty the first part of FETE, officials were focused on the shortfall of employment relative to where it was in February and pointing to the fact that there's still a lot of We're still a lot of jobs short from where we were in February. Well, that's still the case today. We're still three million jobs short of where we were in February. But that ignored the fact that there a lot of people that left the labor forces, and pointed out the labor force participate participation rate did not come back like the FETE expected. There are retirements, There are people that didn't want to work because of COVID risk. Uh there are people who are still sick because of COVID long COVID and all those things. They have made the labor market tighten much faster than what the FETE expect. Now, be fine if the labor market tighten faster than the FETE expected and the FED responded by tightening Monterrey policy. But we're in a situation today where the labor market is very, very very tight and monetary policy is is still extraordinarily easy. So the Fed is late. They're trying to catch up, and they'll start to catch up in March when they tightened at the March of Home c meeting. So what's the road from here? Do you think the Fed's gonna end up having to raise interest rates much more than people currently expect. Yeah, I think they are gonna have to do more than people expect, because you know, if you look at the Federal Reserves forecast, it's a incredibly benign forecast. If you look at their forecast twenty four in the Summary of Economic Projection, what they show is that inflation is going to magically melt away two point six this year, two point three percent next year two point on. The Federal funds rate is not gonna go very high two point one percent by the end of uh and the uneplanyer rate is gonna even even as the undeployer rate is persistently below beyond full employment, So it's not obvious how the FED forecast works. Why does inflation fall if the economy is operating below beyond full employment for three years and monetary policy never gets to a tight setting. So I think the FED hasn't you know, they've they've been in the bullet partly in the sense that they've admitted that they're behind the curve, and then so they're speeding up the pace of removing monetary policy accommodation, but they haven't gotten to the situation place where they actually recognize that they have to actually make monetary policy tight. And I think the last couple of weeks, our market is starting to come to the uh conclusion that monetary policy at some point the cycle is gonna have to be tight. It's not there yet, but we're moving in that direction. And just to continue that thought, I mean, some are suggesting that in order to indicate that it's taking inflation more seriously, the Fed could go for a half a percentage point increase the first time they raise interest rates, rather than this very gradual path people are expecting of a quarter of a percentage point each time do you think that's something that they should be thinking about. Well, I'm certainly certainly worth thinking about it, but I'd be very surprised if they did that. I mean, this FED has tried to be very predictable, you know, in terms of how they communicate and how they act following their communications. So you know, a fifty basis point rate hike, which which certainly you know you could argue it's appropriate, would be a huge shock to markets, and I think it goes very much against you know, everything that Powell has told us over the last eight months. I think would be a huge surprise, and I'd be very surprised if they actually do that. Smiling because I'm remembering I think it was was it Paul Volca in the early eighties who just decided on a Sunday night to raise interest rates by two percentage points and to help with the markets or what they were expecting. You just can't imagine a FED chair doing that these days. Goodness, Stephanie on that is that the markets still have quite a bit of confidence in the FED. You know, if we have a tight labor market, we have higher wages, but inflation expectations are still pretty well anchored, and I think if if inflation expectations were to become unanchored, that would be a science. The markets were losing conference in the FED, and that's why I think we pushed the FED into having to be more aggressive. Well, Bill, we're going to run out of time. But I think there is one big question I was interested in your answer to you have to bet that by the end of this year, the chances are policymakers will either have done too much to tame inflation or too little. And we've had many years where the assumption has been that you should air on the side of of having policy be too loose rather than too tight. The risks of of not giving enough support for the economy but much greater than the risks of doing too much. Has that changed. Are we now looking at a situation where the FED should be more concerned about not doing enough to tame inflation. Well, I think that's that's that's absolutely correct because last cycle inflation was too low for most of the cycle, so the federers are could actually try to see how far they can how tight they can make the labor market without any really big risk of that as a consequence, this time we're starting from a point that inflation is too high, it's above what the FEDS objective is, and the labor market is already very very tight. So I think using the last economic cycle as a template for this cycle, I think it is a very very poor choice. Uh. This cycle is very different in terms of where we're starting in terms of inflation and the unimplant rate. And it's also a very different cycle where we're starting in terms of household balance sheets. Household balance sheets, death service costs are really low, households have a lot of savings. Last cycle, we had lots of damage caused by the Great Financial Crisis. So people who are using the last cycle as a template for this secle, I think are going to be disappointed. Thanks very much for that, Bill Dudley. Now, we're not trying to cover everything in this webinar, everything that's going on in the global economy. We're just trying to zero in on some of the key risks that people are thinking about, and I think the top of that list is China. So we're going to hear now from our chief global economist, frequent participant on Stephanomics, Tom Olig, who also spent eleven years in Beijing and has written two books about the Chinese economy. Tom Thanks, Stephanie Um. So if we were having this conversation a year or so ago, there would be a pretty positive story to tell about how China had weathered the COVID storm. From where we are at the start of twenty two, though, and there's some pretty significant risks and obstacles which China now faces, in particular the Evergrand property slump. It's difficult to disagree with Beijing's strategy here. The property sector is over built and over leaver Ridge, and the entire rickety structure rests on a foundation of moral hazard. An ever Grand in many ways is the poster child for those problems, so allowing ever Grand to default and go into restructuring absolutely makes sense. The trouble is that with so many other developers in a similar position to ever Grand in terms of their leverage levels, and with property such an important driver of growth across the economy as a whole, even making that modest down payment on addressing the problem of moral hazard comes with some significant costs attached. There's confidence in the sector ebbs away, We're seeing sales and investment weekend, and with property directly and indirectly driving about a quarter of China's overall GDP. That has to come at a cost to growth in the year ahead. The second big risk for China looking forward is what happens when the omicron variant hits. Now in China's COVID strategy was brutally effective. It saves lives, It provided the basis for a V shaped recovery in g d P, But now they face some new and some difficult questions, in particular, what's the end game for their strategy. That strategy works in terms of keeping the population healthy, but it does come at a cost of growth. Lockdown's hit consumption. We saw that last summer when retail sales stumbled in the face of the Delta outbreak, and as we heard from Anna, in a nightmare scenario with widespread lockdowns, factories and ports closing down, we could see China contributing to the global supply crunch. We don't think that's the baseline scenario. China so far has done a good job at keeping production on track, but certainly, as cases in the Chian outbreak rise, it's a risk which is worth keeping in mind. So if we pull those pieces together our base case for China's GDP this year is actually pretty positive. We think growth could come in above five for the year, but risks to that outlook from Evergrand from the omicron variant affirmly to the downside, and a much lower number is certainly possible. With all that in mind, it's no surprise that the People's Bank of China has already moved towards stimulus. So just coming back to the question of the property risk, obviously everyone's had to learn the name ever Grand and even think about how to pronounce it. Apart from these monetary policy tools you've talked about, are there any specific policies that China has for managing the boom and bust of the property cycle and maybe getting to a situation where they're not so dependent on property for driving the driving the growth of the economy. Yes, you're you're completely right, Stephanie, and I should have gone with the more flamboyant ever Grandy pronunciation, which which I hear in Hong Kong is a little bit more fun um. So, what China can't do is control the kind of the fundamental problem in the property sector. They can't they can't get away from the problem, that there's massive overbuilding, that the country is littered with ghost towns, the developers have borrowed too much money. That sort of fundamental characteristics of the problem they can't change. What they do have, though, is a very refined and granular set of tools that they can try and use to manage the problem down. So they can They don't just set interest rates. They set interest rates for mortgages specifically, and they can set them at different rates for first time buyers and second time buyers and third time buyers. They can change down payment requirements city by city and change down payment requirements for first time buyers and second time buyers and third time buyers. They can open the credit taps for real estate developers in different ways for different categories of developer. So they can't magically make the problem go away. But what they've done over the last decade is developed this rather precise set of tools for managing it, and I expect we'll see those coming into play in the months ahead. And finally, Tom sh Jingping, we've seen him become more and more powerful as a Chinese president, leader of the Chinese Communist Party, and he's also through that increased the hold of the party over um the economy. We're now seeing him seek a third term as leader, maybe even leadership for life, as someone calling it. What are the economic implications of that? Yes, so she has been moving the sort of pieces into place to ensure that he can have a third term as president and as general secretary of the Communist Party, and that process will sort of reach its endgame at the end of this year, and very likely she will succeed. So there are some short term and some long term implications of that. The short term implication is, well, China in the best of times, has very little tolerance for bad news in the run up to big political events, and appointing she for a third term as president will be a big political event. They have zero tolerance for bad news. So that's a reason to think that they will stay very strict in terms of containing the spread of COVID, and it's also a reason to think I think that in the final analysis, they're not going to allow property to trigger a collapse in the economy this year. Looking longer term, well, one of the big successes of dong Hao Ping, China's great reformer, was getting in place a process for orderly leadership succession and orderly handover from Dong to jang Zamin, from jang Zamin to Jujuin Tao, and from Jujun Tao to shijim ping Um. If Hi Jimping succeeds in getting a third term as China's leader, well there's going to be some new questions about that orderly succession process. The wheels are not going to come off the wagon of Chinese governance immediately, but I think we'd be looking for problems in that area in the years ahead. Thank you very much. So that was a big dollop of economic intelligence from Bloomberg. Next week we might let some non Bloomberg folks get a word in. Finally, David Hood from Bloomberg Tax has this sorry tale of the overburdened Inland Revenue Service switchboard and very long suffering accountants c p a s who are finding they can't ever ever get through. Welcome to the Internal Revenue Service. You can also visit us at www dot IRS dot gov. Got a tax question, who are you going to call to continue in England? Not the i r S in fact, anyone but the I r S, unless, of course, you or your c p A have time to wait wait, wait, and wait some more on hold. That's the opinion of frustrated taxpairs, tax preparers, the White House, and even the agency itself. During peaks tax season, your c p A can expect to be on hold for ninety minutes or more, even if they call what some pros called the bat phone, a dedicated line to the I R S for cp as to call when they have a complicated question. The films have been particularly difficult when certain big things have happened. For instance, if you needed to get ahold of the I R S to deal with a certain penalty notice around the same time that something would happen with the stimulus payments, that would be particularly difficult. That was Rochelle Holds a principle in Crows Washington National Tax Office. Many big things happened in one like more stimulus payments, advanced child tax credit checks, and of course the pandemic. The free market did come up with an idea to help tax professionals. They can, for a fee, hire robots to wait in line for them. A startup called n Q Inc. Offers a service starting around a hundred dollars a month that makes robocalls to the agency's special so called bat phone waits on hold and then when it makes a connection, puts the client through to an I r S agent or your CPA can just call, wait on hold, maybe get some lunch and come back, and of course stay on hold. Thankfully, the agency recognizes these problems and has a strategy in the works to fix them. The I r S has plans to ramp up hiring for its call centers around the country, which have felt the same labor shortage crunch as other businesses. The agency is also rolling out natural language service spots to help taxpayers set up payment plans and get help quicker. However, these plans hinge on the country's and most notoriously unreliable group. That's right, Congress. If Congress can pass President Joe Biden's Build Back Better Bill, it will hand the I r S eight billion dollars a year for the next ten years. That tax pros say will go long way to help hire more people, open more call centers, and roll out better technology. But a bill isn't the magic wand the agency would still need to recruit, hire, train and routine more folks, update I T systems, and tell the public phone lines are open for business. If everything goes perfectly, We're still some years off from solving these problems, said Bill Smith, National director of tax Technical Services for c BIZ. M h M. It would go a long way towards helping that situation get a lot better. Is it? Is it going to happen immediately even with the funding? I don't think so. From Bloomberg tax I'm David Hood. H that's it for this week. Join me for another Stephonomics next week, and if you want more on the global economy, do follow at Economics on Twitter. Also rate this podcast if you like it. This episode was produced by Magnus Henrison, with special thanks to Anna Wong, Bill Dudley, Tom Rlick, and David Hood. Mike Sasso is executive producer of Stephanomics and the head of Bloomberg Podcast is Francesca Levi.

Welcome to the Internal Revenue Service. You can also visit us that wu wu W dot i RS. Don't guard Hello, and don't worry. You haven't just called the inn Revenue Service. You're listening to Stephanomics, the podcast that brings the global economy to you. But if you were trying to get through to the hard working folks who helped to collect America's taxes, you'd have a long time to wait. Keep listening to hear about the extreme lengths that American taxpayers and accountants are going to get through to the i R S. First, though, I wanted to play you part of a webinar we held this week featuring the latest insights on the road ahead for the US economy, China, and the US Central Bank, featuring some of the brightest minds of Bloomberg Economics. It started naturally enough with a great introduction by me. There does seem to be an unusually wide gap right now between where we are and where economists expect us to end up in a year or two time. I mean, the leading assumption when you look at the forecast for twenty three or four is that we're kind of heading back to normal in the global economy by by that time, probably by midy three. And that's fine, that's a traditional assumption that economists makes, sort of reversion to the mean. But you look around you and you think, wow, we're an awfully long way away from normal right now. You know, we've got a large chunk of the workforce isolating at home, maybe due to omicron. We have energy bills soaring in large parts of Europe, and for many American households, millions of workers missing from the labor market supply chain, still in a in a very troubled state. I mean, it all seems very out of whack. So, although it's probably always the case that economists are better at telling you where you're going to end up than how you're going to get there, I think this year that path from a to be from now to normal seems particularly hazardous and uncertain, and I think the potential role of central banks in that also feels particularly challenging. So I'm especially glad that we're focusing today on the downside and upside risks that we're seeing in the global economy. Um, and I'm also very glad that we're going to spend a bit of extra time talking about how the US Central Bank is positioned for this year with one of the former leaders of the Federal Reserve, the former Federals New York Federals President Bill Dudley. So that's all to come, but first I think we should set the scene with our chief US Economist, Anna Wall and how things looking, Thank you, Stephanie. So a big question heading into this year for US is when will the Fed begin to raise rates? And a March rate hike had looked uncertain when we were just entering into this year because omicron has swept through the US like wildfire and cost widespread workers absentaism. There were lots of anecdotes of temporary business closures. So we developed a daily GDP tracker to allow us to better track the disruption of Omicron, and it had pointed to a big plunge in activity in the first week of this year, and using this daily activity index as a tool, we forecast out what GDP would look like at the end of the quarter, and the model forecast the recovery would be in full swing by March and in a reassuring sign, indeed, our daily trecker is already showing signs of improvement in the second week of this year, So this is why we now believe that a March rate hike is in the cards. So then the next question is how many hikes will there be this year, and the FED future market currently expect four hikes, but that forecast is contingent on inflation and unemployment rate evolving as we have written down, and our baseline currently is for inflation to peak in February at seven point two and thereafter we expect it will slow to an average of three. In the labor market, we expect it to continue to show signs of being very tight. Wage growth is now at the highest in the early nineties. There's one point six open jobs for every unemployed person out there UM, and we project unemployment rate to fall to three point five percent or lower by the end of the second quarter. But let me emphasize that our forecast for the inflation is subject to a lot of uncertainty, and we see two non trivial risks in the near term that could push it much higher. So first, um, with China hosting the Winter Olympics in early February and for the s time really open its borders to international visitors, there could be a risk that Amochron will infiltrate into China and with their zero COVID policy, this could um disrupt the production there and re intensify supply chains. And the second risk is that there is a risk of port strikes in June of this year and the along the ports along the West Coast in US as the contract expires between the port workers longshoremen and the ports. So overall we think that the risk are on the upside for more hikes in store than what the market currently expects. But for this year and next year, thank you, Anna, there's a lot there. But I'm interested in what you said about wage growth picking up and also the potential for us to hear from from some union activity or at least in the sort of crucial deal at the ports. And I think power workers have also got potentially a dispute coming down the track. I mean, are we are we going to see a very different kind of US labor market this year than we've seen in recent years? Or is this with more with workers actually um able to extract real wage increases, or is this really just about trying to catch up with with the very high level of inflation. I think that when the labor market is tight as you you're we are seeing right now, as I was saying, one point six open jobs for every unemployed person out there. Just the threat of um you know, your workers quitting. It's that latent threat there that can cause um um employers to raise the wage and you know, submit to request of the workers. And when it comes to the port workers in historically, whenever there's uh where where the port workers are up for renegotiating their UM wages, there has been significant slow down in ports. It happened in, It happened in and at a time when these port workers had been asked to work twenty four hours per day by the by the Biden administration. I think they're fed up, and uh so, the likelihood of that is high. But but back to the you know, to to the your question, I do think that the labor market now is different than what we have seen in the last ten years, just because um there's just just this latent threat of quitting, quitting, which gives a lot of bargaining powers to workers. Those missing workers. We have that the several million workers who as far as we could tell, we were in jobs before COVID struck and maybe lost their jobs during the recession but have not gone back. Is there any sign of of some of those coming back into the picture? Yeah? So you had a estimated how much workers have in their bank by income destiles, and our expectation is that um, the workers which are in shortage there their savings give them enough about to two months of runway to cover their spending. And UM, we were expecting that there would be a flood of labor supply starting this year because of that estimate. And I do see signs of the labor market loosening, but that is right before omicron hit. Okay, so we've got a good picture on the state of the economy and as far as we can see it, and we can see a bit better with those high frequency indicators. But clearly there's the center of a lot of the debate, and certainly what financial markets are focused on is what's the Fed gonna do? Is it going to do too much or too little UM this year? Having now resolved to raise interest rates UM several times in two And it's great to have a versation with Bill Dudley about these things, former chief economists for Goldman Sex and former President of the New York Federal Reserve now a senior adviser to Bloomberg Economics and Bloomberg Opinion columnists. Um, Bill, if we just stepped back briefly, I mean, there's a lot to talk about. But if we think about the FEDS handling of the past two years of the pandemic, did they win the war but lose the piece? You have a lot of people in the peanut gallery now critiquing their view all through last year that inflation was going to be transitory. I think Muhammad al Arian has called it probably the worst inflation call in the history of the Federal Reserve, wasn't it. Well. I think they did a great job at the early stages of the pandemic in terms of their interventions to restore market function. Uh, these financial conditions push into tras to zero. So I give them, you know, a plus, you know, back in March two thousand, twenty April two thy But since then, I think they've made a number of errors. And some of the errors are related to how they implement monetary policy, and some the ears are just bad forecasting. On the monterary policy implementation side, they operationalize their two percent average inflation target regime by essentially tying their hands and saying we cannot lift off, we cannot raise short term rates until three conditions are satisfied. Inflation at two expected to be above two percent for some time in the future, and we've also have to achieve our estimate of maximum sustainable employment. So what that meant was the FED was gonna have policy extremely easy even as the economy reach full employment, so be a big gap between where the FED needed to be versus where the FED was completely self induced er on their part. The second thing that was self induces they were so worried about a taper tantrum that they were very slow to actually taper the rate of asset purchases. So we've ended up in this odd situation today where everyone's talking about FED tightening, but the FED even as we speak, is still buying assets adding accommodation. The other two areas they made I think our heart heart, you know, I would give them less grief about because they were forecasting errors. The first forecasting error, which was significant, was that the inflation shock turned out to be much bigger and lasted much longer than they were anticipating. Nobody was expecting at the beginning of two thousand, uh and and and twenty that we were going to see seven percent CPI inflation by the end of one and so that was a surprise to them. The supply chain disruption just lasted longer than they expected. The second surprise, and it wasn't all completely a bad surprise, is that the labor market tightened much faster than they expected. UH. As you went through and twenty the first part of FETE, officials were focused on the shortfall of employment relative to where it was in February and pointing to the fact that there's still a lot of We're still a lot of jobs short from where we were in February. Well, that's still the case today. We're still three million jobs short of where we were in February. But that ignored the fact that there a lot of people that left the labor forces, and pointed out the labor force participate participation rate did not come back like the FETE expected. There are retirements, There are people that didn't want to work because of COVID risk. Uh there are people who are still sick because of COVID long COVID and all those things. They have made the labor market tighten much faster than what the FETE expect. Now, be fine if the labor market tighten faster than the FETE expected and the FED responded by tightening Monterrey policy. But we're in a situation today where the labor market is very, very very tight and monetary policy is is still extraordinarily easy. So the Fed is late. They're trying to catch up, and they'll start to catch up in March when they tightened at the March of Home c meeting. So what's the road from here? Do you think the Fed's gonna end up having to raise interest rates much more than people currently expect. Yeah, I think they are gonna have to do more than people expect, because you know, if you look at the Federal Reserves forecast, it's a incredibly benign forecast. If you look at their forecast twenty four in the Summary of Economic Projection, what they show is that inflation is going to magically melt away two point six this year, two point three percent next year two point on. The Federal funds rate is not gonna go very high two point one percent by the end of uh and the uneplanyer rate is gonna even even as the undeployer rate is persistently below beyond full employment, So it's not obvious how the FED forecast works. Why does inflation fall if the economy is operating below beyond full employment for three years and monetary policy never gets to a tight setting. So I think the FED hasn't you know, they've they've been in the bullet partly in the sense that they've admitted that they're behind the curve, and then so they're speeding up the pace of removing monetary policy accommodation, but they haven't gotten to the situation place where they actually recognize that they have to actually make monetary policy tight. And I think the last couple of weeks, our market is starting to come to the uh conclusion that monetary policy at some point the cycle is gonna have to be tight. It's not there yet, but we're moving in that direction. And just to continue that thought, I mean, some are suggesting that in order to indicate that it's taking inflation more seriously, the Fed could go for a half a percentage point increase the first time they raise interest rates, rather than this very gradual path people are expecting of a quarter of a percentage point each time do you think that's something that they should be thinking about. Well, I'm certainly certainly worth thinking about it, but I'd be very surprised if they did that. I mean, this FED has tried to be very predictable, you know, in terms of how they communicate and how they act following their communications. So you know, a fifty basis point rate hike, which which certainly you know you could argue it's appropriate, would be a huge shock to markets, and I think it goes very much against you know, everything that Powell has told us over the last eight months. I think would be a huge surprise, and I'd be very surprised if they actually do that. Smiling because I'm remembering I think it was was it Paul Volca in the early eighties who just decided on a Sunday night to raise interest rates by two percentage points and to help with the markets or what they were expecting. You just can't imagine a FED chair doing that these days. Goodness, Stephanie on that is that the markets still have quite a bit of confidence in the FED. You know, if we have a tight labor market, we have higher wages, but inflation expectations are still pretty well anchored, and I think if if inflation expectations were to become unanchored, that would be a science. The markets were losing conference in the FED, and that's why I think we pushed the FED into having to be more aggressive. Well, Bill, we're going to run out of time. But I think there is one big question I was interested in your answer to you have to bet that by the end of this year, the chances are policymakers will either have done too much to tame inflation or too little. And we've had many years where the assumption has been that you should air on the side of of having policy be too loose rather than too tight. The risks of of not giving enough support for the economy but much greater than the risks of doing too much. Has that changed. Are we now looking at a situation where the FED should be more concerned about not doing enough to tame inflation. Well, I think that's that's that's absolutely correct because last cycle inflation was too low for most of the cycle, so the federers are could actually try to see how far they can how tight they can make the labor market without any really big risk of that as a consequence, this time we're starting from a point that inflation is too high, it's above what the FEDS objective is, and the labor market is already very very tight. So I think using the last economic cycle as a template for this cycle, I think it is a very very poor choice. Uh. This cycle is very different in terms of where we're starting in terms of inflation and the unimplant rate. And it's also a very different cycle where we're starting in terms of household balance sheets. Household balance sheets, death service costs are really low, households have a lot of savings. Last cycle, we had lots of damage caused by the Great Financial Crisis. So people who are using the last cycle as a template for this secle, I think are going to be disappointed. Thanks very much for that, Bill Dudley. Now, we're not trying to cover everything in this webinar, everything that's going on in the global economy. We're just trying to zero in on some of the key risks that people are thinking about, and I think the top of that list is China. So we're going to hear now from our chief global economist, frequent participant on Stephanomics, Tom Olig, who also spent eleven years in Beijing and has written two books about the Chinese economy. Tom Thanks, Stephanie Um. So if we were having this conversation a year or so ago, there would be a pretty positive story to tell about how China had weathered the COVID storm. From where we are at the start of twenty two, though, and there's some pretty significant risks and obstacles which China now faces, in particular the Evergrand property slump. It's difficult to disagree with Beijing's strategy here. The property sector is over built and over leaver Ridge, and the entire rickety structure rests on a foundation of moral hazard. An ever Grand in many ways is the poster child for those problems, so allowing ever Grand to default and go into restructuring absolutely makes sense. The trouble is that with so many other developers in a similar position to ever Grand in terms of their leverage levels, and with property such an important driver of growth across the economy as a whole, even making that modest down payment on addressing the problem of moral hazard comes with some significant costs attached. There's confidence in the sector ebbs away, We're seeing sales and investment weekend, and with property directly and indirectly driving about a quarter of China's overall GDP. That has to come at a cost to growth in the year ahead. The second big risk for China looking forward is what happens when the omicron variant hits. Now in China's COVID strategy was brutally effective. It saves lives, It provided the basis for a V shaped recovery in g d P, But now they face some new and some difficult questions, in particular, what's the end game for their strategy. That strategy works in terms of keeping the population healthy, but it does come at a cost of growth. Lockdown's hit consumption. We saw that last summer when retail sales stumbled in the face of the Delta outbreak, and as we heard from Anna, in a nightmare scenario with widespread lockdowns, factories and ports closing down, we could see China contributing to the global supply crunch. We don't think that's the baseline scenario. China so far has done a good job at keeping production on track, but certainly, as cases in the Chian outbreak rise, it's a risk which is worth keeping in mind. So if we pull those pieces together our base case for China's GDP this year is actually pretty positive. We think growth could come in above five for the year, but risks to that outlook from Evergrand from the omicron variant affirmly to the downside, and a much lower number is certainly possible. With all that in mind, it's no surprise that the People's Bank of China has already moved towards stimulus. So just coming back to the question of the property risk, obviously everyone's had to learn the name ever Grand and even think about how to pronounce it. Apart from these monetary policy tools you've talked about, are there any specific policies that China has for managing the boom and bust of the property cycle and maybe getting to a situation where they're not so dependent on property for driving the driving the growth of the economy. Yes, you're you're completely right, Stephanie, and I should have gone with the more flamboyant ever Grandy pronunciation, which which I hear in Hong Kong is a little bit more fun um. So, what China can't do is control the kind of the fundamental problem in the property sector. They can't they can't get away from the problem, that there's massive overbuilding, that the country is littered with ghost towns, the developers have borrowed too much money. That sort of fundamental characteristics of the problem they can't change. What they do have, though, is a very refined and granular set of tools that they can try and use to manage the problem down. So they can They don't just set interest rates. They set interest rates for mortgages specifically, and they can set them at different rates for first time buyers and second time buyers and third time buyers. They can change down payment requirements city by city and change down payment requirements for first time buyers and second time buyers and third time buyers. They can open the credit taps for real estate developers in different ways for different categories of developer. So they can't magically make the problem go away. But what they've done over the last decade is developed this rather precise set of tools for managing it, and I expect we'll see those coming into play in the months ahead. And finally, Tom sh Jingping, we've seen him become more and more powerful as a Chinese president, leader of the Chinese Communist Party, and he's also through that increased the hold of the party over um the economy. We're now seeing him seek a third term as leader, maybe even leadership for life, as someone calling it. What are the economic implications of that? Yes, so she has been moving the sort of pieces into place to ensure that he can have a third term as president and as general secretary of the Communist Party, and that process will sort of reach its endgame at the end of this year, and very likely she will succeed. So there are some short term and some long term implications of that. The short term implication is, well, China in the best of times, has very little tolerance for bad news in the run up to big political events, and appointing she for a third term as president will be a big political event. They have zero tolerance for bad news. So that's a reason to think that they will stay very strict in terms of containing the spread of COVID, and it's also a reason to think I think that in the final analysis, they're not going to allow property to trigger a collapse in the economy this year. Looking longer term, well, one of the big successes of dong Hao Ping, China's great reformer, was getting in place a process for orderly leadership succession and orderly handover from Dong to jang Zamin, from jang Zamin to Jujuin Tao, and from Jujun Tao to shijim ping Um. If Hi Jimping succeeds in getting a third term as China's leader, well there's going to be some new questions about that orderly succession process. The wheels are not going to come off the wagon of Chinese governance immediately, but I think we'd be looking for problems in that area in the years ahead. Thank you very much. So that was a big dollop of economic intelligence from Bloomberg. Next week we might let some non Bloomberg folks get a word in. Finally, David Hood from Bloomberg Tax has this sorry tale of the overburdened Inland Revenue Service switchboard and very long suffering accountants c p a s who are finding they can't ever ever get through. Welcome to the Internal Revenue Service. You can also visit us at www dot IRS dot gov. Got a tax question, who are you going to call to continue in England? Not the i r S in fact, anyone but the I r S, unless, of course, you or your c p A have time to wait wait, wait, and wait some more on hold. That's the opinion of frustrated taxpairs, tax preparers, the White House, and even the agency itself. During peaks tax season, your c p A can expect to be on hold for ninety minutes or more, even if they call what some pros called the bat phone, a dedicated line to the I R S for cp as to call when they have a complicated question. The films have been particularly difficult when certain big things have happened. For instance, if you needed to get ahold of the I R S to deal with a certain penalty notice around the same time that something would happen with the stimulus payments, that would be particularly difficult. That was Rochelle Holds a principle in Crows Washington National Tax Office. Many big things happened in one like more stimulus payments, advanced child tax credit checks, and of course the pandemic. The free market did come up with an idea to help tax professionals. They can, for a fee, hire robots to wait in line for them. A startup called n Q Inc. Offers a service starting around a hundred dollars a month that makes robocalls to the agency's special so called bat phone waits on hold and then when it makes a connection, puts the client through to an I r S agent or your CPA can just call, wait on hold, maybe get some lunch and come back, and of course stay on hold. Thankfully, the agency recognizes these problems and has a strategy in the works to fix them. The I r S has plans to ramp up hiring for its call centers around the country, which have felt the same labor shortage crunch as other businesses. The agency is also rolling out natural language service spots to help taxpayers set up payment plans and get help quicker. However, these plans hinge on the country's and most notoriously unreliable group. That's right, Congress. If Congress can pass President Joe Biden's Build Back Better Bill, it will hand the I r S eight billion dollars a year for the next ten years. That tax pros say will go long way to help hire more people, open more call centers, and roll out better technology. But a bill isn't the magic wand the agency would still need to recruit, hire, train and routine more folks, update I T systems, and tell the public phone lines are open for business. If everything goes perfectly, We're still some years off from solving these problems, said Bill Smith, National director of tax Technical Services for c BIZ. M h M. It would go a long way towards helping that situation get a lot better. Is it? Is it going to happen immediately even with the funding? I don't think so. From Bloomberg tax I'm David Hood. H that's it for this week. Join me for another Stephonomics next week, and if you want more on the global economy, do follow at Economics on Twitter. Also rate this podcast if you like it. This episode was produced by Magnus Henrison, with special thanks to Anna Wong, Bill Dudley, Tom Rlick, and David Hood. Mike Sasso is executive producer of Stephanomics and the head of Bloomberg Podcast is Francesca Levi.