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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. 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. Heading into Jackson Hole in about a week's time, and an important speech just around the corner from a so far tight lip fed share Kevin Warsh will hear from him in a week's time. Joining us now to extend the conversation on the Federal Reserve. The San Francisco President Mary Daily joined us for more. President Day, always good to hear from you, So thanks for making some time for Bloomberg surveilor I want to bring up the bond market, and I'm sure you anticipated I would go there first, the long bond and the rise we're seeing in yields. President Day, from your standpoint, what signal, if any do you take from the sal for the long end, Well.
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Speaker 3: You know, when you look at the long end, it is typically driven by structural factors like fiscal sustainability, geopolitical rebalancing, the massive AI investment for this industrial renaissance which people are very excited about, and those factors are driving this. The thing that I look at specifically is this is happening across the globe.
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Speaker 4: It's not just a US phenomena.
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Speaker 3: It's a global phenomena, and it doesn't give us a lot of signal about what we should do in the policy adjustments or the policy calibration for the Fed. And there we look at the short end more than the longer end, paying attention to the longer end, but really focusing on the job number one, which is restoring price stability.
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Speaker 1: Right now, do you think President Daily that the long end of the yield curve is doing some of the work for the Federal Reserve by tightening monetary conditions in a more significant way.
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Speaker 3: You know, I always hesitate to say that the markets do our work, but what I will say is it begs the question, what problem are we trying to solve by adjusting policy preemptively. You know, there's a lot of discussion about our credibility there. I don't see our credibility at risk. I also hear a lot about should we be making preemptive cuts or hikes rather, and I don't see a lot of evidence that that's an urgent problem to solve. So really this is about watching the inputs from the financial markets, looking at the thirty, the ten, and the two, and asking are we getting mixed signals or different signals?
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Speaker 4: And you know, right now, on the.
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Speaker 3: Shorter end of the yield curve, markets seem to have priced in a little bit more tightening, but they're reacting to the data just like we would expect them to. Inflation prints a little softer than they expect, the labor market a little softer than they expect, They push out rate hikes that they had priced in, and adjust as the data comes. So I think they seem to be signaling to us that they understand our reaction function. And importantly, I'm looking at inflation compensation and inflation expectations and you don't see any you know, worrisome swings in those pieces of data either.
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Speaker 4: So I think policy is in a good place.
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Speaker 3: But watching this ten and thirty to see what we need to think about what are the structural factors. It's giving us a signal about something, and I think one of the big signals is the AI demand.
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Speaker 1: President Dala, We'll get into AI demand. But I am curious about the reaction function. You said that the market seems to be understanding the Fed's reaction function. What is your reaction function in terms of incoming information that would make you think that an adjustment higher for rates would be required.
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Speaker 3: Well, you know, last week I gave a speech where I talked about really there's you know, there's many scenarios that could occur, but two seem very important for me at this point. One is the one that I would suggest is the modal outlook. My modal outlook is that you know, and also you saw in the minutes, it's it's a majority of the participant modal outlook that inflation is being driven up by a series of shocks, and those shocks will roll up, they'll roll down, they'll roll through, and as that dissipates, that inflation will we turned to target in part because we have policy at a very slightly restrictive level.
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Speaker 4: So there's that dynamic.
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Speaker 3: But then there's the dynamic of maybe the fact that we have so many shocks coming at once and they're overlapping, they can have an independent compounding effect that means that the total effect is greater than the sum of its parts. The conventional dynamics of shocks just aren't working like they were. I'm not seeing evidence of that right now, but I definitely think we should keep that in mind and watching. If that happens, we would have to we'd have an inflation problem that we would want to treat with tighter policy. In the meantime, I was very supportive of the July hold and continue to look at the information that comes between now and the next meeting about whether any signs of that worrisome dynamic would be forming. And I haven't seen them yet, And the recent prints on both inflation and the labor market didn't really change that picture for me.
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Speaker 4: At this point.
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Speaker 1: There's been kind of a paradox forming right now where you've seen inflation above target for more than five years at the same time that the labor market seems to be kind of meth I mean, it's okay, but people keep talking about low higher, low fire and that that kind of dynamic with real wages not keeping pace for the past five years, we'll.
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Speaker 4: Lead inflation to go lower. Why hasn't it right?
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Speaker 1: I mean, when does that relationship reassert itself.
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Speaker 3: Well, one of the things that is true is that we've had many periods in our history with you know, essentially, if you're thinking in economics terms, with the Philip curve is very flat, and you just don't see the relationship between the labor market and price inflation. And it also kind of illustrates why the shocks have been a big component of overall inflation. You know, the tariff shock, the oil price shock, and now the AI investment boom shock. And in all of those you have to ask what is the expectation of their duration? Are they spreading to other sectors than the ones that they directly affect, and what do we think they will do if they, you know, compound with each other. Will that make a difference or will it not? So I think that's what's really driving it. I wouldn't look to the labor market. You don't see any signs that the labor market is contributing to inflation. And I really think at this point you have to look at these other factors because that link between you know, wages and price stability is often weak. We came off a period where it was very strong because we saw a very frothy labor market, very strong labor market, and people were saying that they were worried about wage price spiral. I think I've talked to you both about that, but we're way past that, and now we have to look at these other factors driving inflation. And so I'd say the main contributor to why inflation is persistent for so long under even when we've had restrictive policy, is because they have these shocks, and then of course service price inflation is just sticky or it takes a while to come down.
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Speaker 2: President Deanning, I'm just going to keep our audience on top of the moves with saying at the bomb market at the long end of the curve up close to seven basis points thirties at the moment if you bring up the board around five twenty six yield hire through the levels. This is important. We've taken back much of the rally, in fact, all of it since we had that Treasury announcement this time yesterday at eight thirty Eastern time off the back of this move in the bottom market, equality futures lower yzero point six percent on the S and P five hundred, President Daily, I can imagine you'd love to avoid all the conversation about Treasury, the department and issuance, but forgive me, I have to go there. There are many people who believe we'll see a continuation of this Treasury Department under Scott Besson of the policies that we saw under Janney Yellen, and that will see less issuance of the long end and more supply at the front end. If T bill issuance continues to climb and account for more and more of the issuance coming from the Treasury. President Day, how does that view, How does that change your view on what to do and what not to do with policy? What does it mean for the everyday workings of the Federal Reserve, who is very focused on managing short term rates.
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Speaker 3: Well, I'd say these are early days, and I wouldn't want to be preemptive and sort of discussing those types of things until we've had a chance to think through those issues. But the Treasury Secretary is different than the Fed. The Fed is talking about price stability and full employment. And what I do know, and we've historically been able to do this, is that we have a goal and we can achieve those goals through our policy implementation, and we will find a way to do the job that Congress gave us, which is restore inflation to two percent as our goal as we define it, and do that price stability. So I think we don't want to worry about the mechanics of how to do that as much as the commitment to achieve it.
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Speaker 2: Forgive me for going there, but it's in conflict with what you're trying to achieve when.
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Speaker 3: You see the treasure rates at this point. I ultimately I think this is really important, but it's the Treasury Secretary's job, not the federal reserves job, and we have our own job which is very important. But also we're not quite there yet, So I'm going to focus there.
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Speaker 2: The Treasury Secretary at the moment, and you'll forgive me for pushing, is actually trying to influence financial conditions. You could see that yesterday yields came in. You could see the dollar weaken as well. Given the moves happening Gauseware and financial markets particularly and crude. You do have to wonder, President, and if that's an increasing challenge for the Federal Reserve that they might have to confront.
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Speaker 4: It sounds like that's something you're interested in.
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Speaker 3: But again, I really am in the work for the Federal Reserve, and I think importantly, you know what, and I'm pushing back in this, the important thing the American people need to know is that the Federal Reserve cares about its independence and its credibility and sticks to its remit. You know, we take in all the information, we look at everything, because those are important inputs, but we know what our job is and we focus.
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Speaker 4: On doing that and that.
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Speaker 3: You know, if you want to talk about inflation, compensation and expectations and FED credibility, I'm happy to talk about those things with the labor market. But I really do think that with our job right in the importance area here and we aren't meeting our target yet, we really have to focus there.
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Speaker 1: President, how would you characterize right now the overall economy? And we've talked about how there is this sort of heat coming, but right now, do you think that it's solid, do you think it's expanding, or do you think that it's decelerating.
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Speaker 3: You know what I'm really seeing and it's an interesting time. You know, I think people say it's confusing, there's contradictory data. It is true that the typical historical ways we think and measure the economy, the dynamics, and the inter relationships don't seem to be squaring up like they would typically do. So then what do you think? What do you look at when you talk to businesses. They're cautiously optimistic, and they're cautiously optimistic beyond the AI sector where they're just optimistic and they're optimistic. They think of this, they call it an industrial renaissance. We are in the next industrial revolution. So they have all that enthusiasm. But what I really watch is what are other businesses saying? What are other businesses thinking? And they're focused on the fact that consumers are trading down and feel a little bit tighter in their pocket.
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Speaker 4: Books, and they're spending.
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Speaker 3: But they're also focused on they keep coming to their business, they keep wanting to do things, and importantly, I start to see these businesses. I'm seeing these businesses using AI really working hard to see how can this technology, which is in the development stage, really how can it affect their business processes, even the physical world that they work in, and what can they do to make things better. So I'd say that there's this all this enthusiasm about the future and a lot of anxiety about the present, and that is a colliding piece. Now, if you talk to the consumer, they're still there. They're still spending, although it's slowing and they're trading down, but they do feel more precarious. You can see that in the sentiment surveys either of confidence or workers.
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Speaker 4: And I think it's in this.
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Speaker 3: Low fire, low higher environment that they feel. It's an uncomfortable stability. It's an uncomfortable stability that we're not really accustomed to.
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Speaker 4: But the policy maker is a policy maker.
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Speaker 3: We have to ask, is it sending any weakening signals? Do we see any sense that things are fragile? And I just don't see that yet. And you saw that in the claims data today. You just don't see signs that the labor market is faltering. You simply see signs that it's running around at.
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Speaker 4: A very low level.
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Speaker 3: And the most important question I'm asking CEOs right now about the labor market is where are your cutting back plans? You're in a low hiring, low firing. But do you have those plans moved to the front of your desk and are you watching them carefully? And right now they're there, They know what they would do, but they still see that cautious optimism of.
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Speaker 4: Trying to meet output growth.
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Speaker 3: Where it is and be not the last in line to do that, the first in line.
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Speaker 4: To do that.
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Speaker 1: President Daily, you mentioned artificial intelligence and the idea that a lot of these companies are trying to deploy AI tools and lots of creative.
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Speaker 4: Ways right now.
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Speaker 1: Is it still more inflationary that it is disinflationary in terms of productivity? Is that something that the FED needs to combat or address or is that something that the FED can look through with the hopes that there will be more productivity on the other side.
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Speaker 3: This will all come down to something that we have to watch, which is is this a relative demand chock? Is it changing the relative price of technology goods or is it spreading more generally into think of data center buildouts. Is that pushing up the price of construction workers everywhere or is it simply you know you're getting specifically trained people or people are coming to do those things. Right now, I'm not seeing a broad spill over in the broader inflation measures. I am seeing a rise in software and technology goods. Those are pushing up, but that's a relatively small sector of the overall price indices, and so I haven't seen evidence of that, but that's what we would have to watch. And so the investment growth is very very strong, and that's affecting interest rates as you see long data yields, but you don't see that pushing itself into price inflation writ large, although you definitely see it. If you're trying to buya high and technology good you.
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Speaker 4: See some effect there.
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Speaker 3: So we'll watch that whether that spills over into consumer prices, consumer goods and services. So far haven't seen a lot of that, but we will. That's definitely if you if your coffee maker starts rising in price because the chips that go in, and if you buy one of those new fancy ones, then if that starts going up, that's a sign of broader based problems or audible biles.
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Speaker 4: But yet we haven't. We haven't seen that of yet.
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Speaker 1: President Daily, You've mentioned that policy is in a fairly good place right now as all of the members look at the incoming data Is there anything that's transpired that makes you question that, or has the data been more of the same to indicate that the FED is in a good place to keep watching the data for a while longer.
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Speaker 4: I'm on the latter point you made.
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Speaker 3: I think we're still in a good place to keep watching the data. As I mentioned, you know, the two prints that have come out on inflation and the labor market didn't make didn't really clear much up for me. You know, I'm not going to get on the bandwagon of c we had a softer inflation print, we should stop worrying about the risks of higher inflation. I don't think that's right, and I don't think the labor market print suggest that that there's any impending weakness there. But we have to continue to watch these things, and importantly, I think with inflation, elevate it for as long as it has been, we have to constantly discipline ourselves to watch what's happening to inflation expectations, what's happening to producer instinct to raise prices?
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Speaker 4: Are they able to right now? They say they're not.
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Speaker 3: They're really not pushing all their input cost increases through to prices. Consumer prices So those are the dynamics to watch and continue to watch the labor market. But if I look at the two we are missing on our inflation goal quite a bit, and the labor market is relatively stable. So a lot of my attention is on that inflation miss and how to get this back down to two percent? And when do I have a sufficient amount of confidence to say we're on our way right now? I think that's the motive view, but I don't think it's so modal. There's the probability isn't so large on that front, and you can't watch these risks.
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Speaker 2: I mind the penalty books now, I feel like I might be you.
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Speaker 3: Could ask her, so you're not in the penalty box.
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Speaker 2: You always try it. I'll always try. Mary is good to see. Thank you, the San Francisco to marry Daddy.
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Speaker 4: Thank you.
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Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Nidia Richardson of ADP listening to that conversation, she joins us now in anticipation of Jackson hawaiiming and the annual FED get together next week, Nida, welcome to the program. How much pressure is on this institution heading into next week's get together.
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Speaker 5: I think they're under a lot of pressure because it's coming from all directions, and some of the pressure is solvable, and some of it, frankly isn't. Tensions in the Middle East not solvable by the Federal Reserve. But what's going on get to the two and a half percent target. They're making good progress, and that's good news. But I want to draw a sharp distinction between what's good news for the markets and what's good news for the worker, because that has been growing in the gap. We have a new paper out just this week showing that. So I think the Fed has a lot of different pressures, and not all of them they're going to be able to resolve.
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Speaker 1: Neila, One thing that the paper that you're talking about pointed to is this idea that wages really have not kept up for a significant proportion of overall US workers with the pace of inflation over the past five years. I just wonder whether that can continue without a downturn and consumer spending. Can you see an absorption of additional price increases if you don't have wages keeping pace.
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Speaker 4: Yeah.
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Speaker 5: My colleague Lee Wang and professors Eric Hers and Christina Patterson looked into sixteen million workers between twenty twenty one and twenty twenty four. To answer just that question, you know, when wages sore pay did not keep pace. And that's because employers, so those very employers that the FED is listening to, tend to have structural permanence in their wage increases. They all tend to give about the same amount of wages to the same amount of people. It's usually about three percent. It's usually whole numbers. And when inflation is sourced to seven percent, workers lose ground. And when those inflation shocks are unexpected, that loss approaching seeing power can persist for years. Fast forward to just last week, we saw consumer sentiment fall by twelve point four percent, and where was it The largest older workers who are least able to keep up with inflation increases for a variety of reasons. And so when you circle back to the FED and what really the inflation backdrop means for the consumer and the household, you have consumers whose wages are just not keeping up from past inflation, let alone current bouts of inflation that we're seeing right now.
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Speaker 1: You know what happens when you include people who change jobs and maybe got a pay increase.
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Speaker 4: That's the power of the worker.
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Speaker 5: That's the only way really that workers can really use their leverage in the workplace to outrun inflation. We saw them, we called it the Great Resignation, and we saw that workers were switching jobs. But guess what, these were low wage workers mostly that were able to take advantage of it. They were The advantage didn't last long because once you switch a job, you're still stuck in that permanent, sticky wage increase, and so it didn't have lasting effects. Thirty seven percent of workers, whether they switched jobs or stayed, saw real wage increases in those four years, according to our paper. And that's why when you go back to the Michigan sentiment survey, only eight percent of respondents said that their real incomes are going to keep up with inflation.
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Speaker 4: That's a very low number.
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Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Stocks failing to hold onto gains as bond yeards continue to climb. Mana. Mahajanabedwick Jones writing, the Treasury announcement may help ease near term liquidity pressures and improve market functioning. However, it does not address what we consider the key factors driving yields. Many joins us now for more man, welcome to the program. Look, it's easy to get dramatic whenever we see yields start to drift higher. But how concerned are you about what's happening at the long end of this yield curve?
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Speaker 4: Yeah?
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Speaker 6: You know, Look, I think we have seen the tenure over this cycle over the last several years hit a five percent plus level. It didn't stay there long. But could we be heading in that direction? Absolutely? And I think that is really kind of the line in the sand for a lot of investors. At that point, some quantitative investors do tend to step back into the market. But could this time be different in that we have no resolution to your point earlier on the fiscal deficit, we have a massive amount of AI issuance and supply coming to the market, and by the way, global yields are trending all in the same direction. Now, keep in mind, what does rising yields.
00:21:13
Speaker 4: Do to the real economy?
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Speaker 6: Well, yes, it pressures puts upward pressures on costs, cost of borrowing for consumers, for corporations, but it also creates an alternative to equities. And keep in mind that old adage there is no alternative. Well, now, with thirty years at five plus percent and the ten you're at four point seven or so, could there be an alternative for those that are seeking yield, maybe in retirement, near retirement, or just looking from income opportunities that we think is the silver lining here for those that are looking for relatively risk free income opportunities versus what we've seen in this rally in equities. There could be some opportunities on the horizon.
00:21:53
Speaker 2: Here following this take for take now it's now a seven basis point move for the long end. I think it's fair to say based on where we were at eight thirty East and yesterday morn we've taken back all of the move post the announcement at eight thirty from the Treasury. Let's just stay on that. Because of all the research we've all read in the last twenty four hours, most of it talks about twenty twenty three and echoes of twenty twenty three and the moment you got the scent, the whiff that Yellen was blinking, that was the moment to buy. There is a group on Wall Street that suggests we've just seen that moment from Treasury Secretary Scott Best and there's another group on Wall Street that says, this is a very very different unforgiving bond market bank drop, it requires a much bigger solution, which camp you in.
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Speaker 6: Yeah, you know, look, I think this administration actually is quite focused on the yield picture. And we saw it last year too, when TIFFs were creating a massive amount of uncertainty. Wasn't the equity market selling off that created this or cause it this administration to blink? It was actually bond yields moving higher. And so this administration in particular is quite sensitive to this rapid move higher in yields, and it is actually taking steps to try to kind of reverse some of the function we're seeing now. All that being said, to your point, this is putting a bandage on a very very much bigger problem. And so you know, increasing long year yield purchases from two billion to four billion in a twenty trillion plus economy doesn't.
00:23:16
Speaker 4: Really do much.
00:23:17
Speaker 6: And so what we really need to see is the structural change that we are all talking about. But no administration historically has taken on that task, and so I think that's a tall order.
00:23:28
Speaker 4: All that being.
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Speaker 6: Said, we are also in an economy where we are seeing massive secular tailwinds from AI, their earning story remains intact. We've seen Atlanta fed GDP now at four percent, and by the way, the consumer, despite some of the near term headwinds, has held in there, especially that upper income consumer, and so not an environment where we are seeing yield's rise and a recession on the horizon. So there is still opportunity, we think in the equity market, and maybe some opportunity for those yield income consumers as well.
00:24:02
Speaker 1: So you're still bullish despite the fact that we've seen yields rise at the long end.
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Speaker 6: You know, overall, we think the backdrop of this macro backdrop has not shifted, and we do think that equities make a lot of sense here now to your point earlier on seasonality, we had a really nice run in equities through June and July and early August, and we're heading into September and October, which historically have not been great months for the equity markets. But keep in mind we're also in a midterm election year, and historically post midterm elections, equities tend to rally as some of that uncertainty is lifted. So could some of this play out you know, history doesn't always repeat itself, but it could rhyme to some extent.
00:24:42
Speaker 4: These could be issues that we face in the near term.
00:24:45
Speaker 6: But we'll have to see how not only the treasury market plays out, but how the FED reacts to some of what we're seeing. Do they think that the treasuries are doing some of the work, some of the restriction for them, or will they have to act regardless, And that could really be the game changer in terms of how equities play out.
00:25:02
Speaker 1: So in other words, Mona, you don't see the rise and long end yields necessarily affecting the overall dynamic in terms of being bullish of both equities and maybe short end bonds. But if the FED takes action hikes rates, that's the game changer. That would make you more negative on stock, so to make you more positive on bonds.
00:25:21
Speaker 6: You know, I think generally with an earnings back drop of thirty percent this year, it is tough to fight the tape. In terms of what's happening in the equity market, if the FED has to raise one or two times, we don't think that derails the broader story. Now in terms of yields, you know, our team is looking at ten years between four and a half to five percent. If we get much above that, we could reconsider our stance on equities as well. As we noted you know there's an alternative. Then the evaluations come under pressure. There could be a shift in the narrative, but for now we remain contained in that four and a half to five percent yield range. We have the strong earnings drop supporting US and the Fed by the way we think is torn. We've seen a couple of better than expected inflation prints, we'll get one more on September eleventh before the September sixteenth meeting, and we've seen a labor market and consumer that has really been mixed. So not one where the Fed may want to continue to put pressure on and cause some other concerns in the macroeconomy as well.
00:26:20
Speaker 2: Mana, it's got to see you to get your reaction. Mana Mahajan there at Edwick James. This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, an gio 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.
Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
00:00:11
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. 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. Heading into Jackson Hole in about a week's time, and an important speech just around the corner from a so far tight lip fed share Kevin Warsh will hear from him in a week's time. Joining us now to extend the conversation on the Federal Reserve. The San Francisco President Mary Daily joined us for more. President Day, always good to hear from you, So thanks for making some time for Bloomberg surveilor I want to bring up the bond market, and I'm sure you anticipated I would go there first, the long bond and the rise we're seeing in yields. President Day, from your standpoint, what signal, if any do you take from the sal for the long end, Well.
00:01:09
Speaker 3: You know, when you look at the long end, it is typically driven by structural factors like fiscal sustainability, geopolitical rebalancing, the massive AI investment for this industrial renaissance which people are very excited about, and those factors are driving this. The thing that I look at specifically is this is happening across the globe.
00:01:28
Speaker 4: It's not just a US phenomena.
00:01:30
Speaker 3: It's a global phenomena, and it doesn't give us a lot of signal about what we should do in the policy adjustments or the policy calibration for the Fed. And there we look at the short end more than the longer end, paying attention to the longer end, but really focusing on the job number one, which is restoring price stability.
00:01:47
Speaker 1: Right now, do you think President Daily that the long end of the yield curve is doing some of the work for the Federal Reserve by tightening monetary conditions in a more significant way.
00:01:57
Speaker 3: You know, I always hesitate to say that the markets do our work, but what I will say is it begs the question, what problem are we trying to solve by adjusting policy preemptively. You know, there's a lot of discussion about our credibility there. I don't see our credibility at risk. I also hear a lot about should we be making preemptive cuts or hikes rather, and I don't see a lot of evidence that that's an urgent problem to solve. So really this is about watching the inputs from the financial markets, looking at the thirty, the ten, and the two, and asking are we getting mixed signals or different signals?
00:02:32
Speaker 4: And you know, right now, on the.
00:02:33
Speaker 3: Shorter end of the yield curve, markets seem to have priced in a little bit more tightening, but they're reacting to the data just like we would expect them to. Inflation prints a little softer than they expect, the labor market a little softer than they expect, They push out rate hikes that they had priced in, and adjust as the data comes. So I think they seem to be signaling to us that they understand our reaction function. And importantly, I'm looking at inflation compensation and inflation expectations and you don't see any you know, worrisome swings in those pieces of data either.
00:03:06
Speaker 4: So I think policy is in a good place.
00:03:08
Speaker 3: But watching this ten and thirty to see what we need to think about what are the structural factors. It's giving us a signal about something, and I think one of the big signals is the AI demand.
00:03:20
Speaker 1: President Dala, We'll get into AI demand. But I am curious about the reaction function. You said that the market seems to be understanding the Fed's reaction function. What is your reaction function in terms of incoming information that would make you think that an adjustment higher for rates would be required.
00:03:38
Speaker 3: Well, you know, last week I gave a speech where I talked about really there's you know, there's many scenarios that could occur, but two seem very important for me at this point. One is the one that I would suggest is the modal outlook. My modal outlook is that you know, and also you saw in the minutes, it's it's a majority of the participant modal outlook that inflation is being driven up by a series of shocks, and those shocks will roll up, they'll roll down, they'll roll through, and as that dissipates, that inflation will we turned to target in part because we have policy at a very slightly restrictive level.
00:04:13
Speaker 4: So there's that dynamic.
00:04:14
Speaker 3: But then there's the dynamic of maybe the fact that we have so many shocks coming at once and they're overlapping, they can have an independent compounding effect that means that the total effect is greater than the sum of its parts. The conventional dynamics of shocks just aren't working like they were. I'm not seeing evidence of that right now, but I definitely think we should keep that in mind and watching. If that happens, we would have to we'd have an inflation problem that we would want to treat with tighter policy. In the meantime, I was very supportive of the July hold and continue to look at the information that comes between now and the next meeting about whether any signs of that worrisome dynamic would be forming. And I haven't seen them yet, And the recent prints on both inflation and the labor market didn't really change that picture for me.
00:05:01
Speaker 4: At this point.
00:05:01
Speaker 1: There's been kind of a paradox forming right now where you've seen inflation above target for more than five years at the same time that the labor market seems to be kind of meth I mean, it's okay, but people keep talking about low higher, low fire and that that kind of dynamic with real wages not keeping pace for the past five years, we'll.
00:05:20
Speaker 4: Lead inflation to go lower. Why hasn't it right?
00:05:23
Speaker 1: I mean, when does that relationship reassert itself.
00:05:27
Speaker 3: Well, one of the things that is true is that we've had many periods in our history with you know, essentially, if you're thinking in economics terms, with the Philip curve is very flat, and you just don't see the relationship between the labor market and price inflation. And it also kind of illustrates why the shocks have been a big component of overall inflation. You know, the tariff shock, the oil price shock, and now the AI investment boom shock. And in all of those you have to ask what is the expectation of their duration? Are they spreading to other sectors than the ones that they directly affect, and what do we think they will do if they, you know, compound with each other. Will that make a difference or will it not? So I think that's what's really driving it. I wouldn't look to the labor market. You don't see any signs that the labor market is contributing to inflation. And I really think at this point you have to look at these other factors because that link between you know, wages and price stability is often weak. We came off a period where it was very strong because we saw a very frothy labor market, very strong labor market, and people were saying that they were worried about wage price spiral. I think I've talked to you both about that, but we're way past that, and now we have to look at these other factors driving inflation. And so I'd say the main contributor to why inflation is persistent for so long under even when we've had restrictive policy, is because they have these shocks, and then of course service price inflation is just sticky or it takes a while to come down.
00:06:55
Speaker 2: President Deanning, I'm just going to keep our audience on top of the moves with saying at the bomb market at the long end of the curve up close to seven basis points thirties at the moment if you bring up the board around five twenty six yield hire through the levels. This is important. We've taken back much of the rally, in fact, all of it since we had that Treasury announcement this time yesterday at eight thirty Eastern time off the back of this move in the bottom market, equality futures lower yzero point six percent on the S and P five hundred, President Daily, I can imagine you'd love to avoid all the conversation about Treasury, the department and issuance, but forgive me, I have to go there. There are many people who believe we'll see a continuation of this Treasury Department under Scott Besson of the policies that we saw under Janney Yellen, and that will see less issuance of the long end and more supply at the front end. If T bill issuance continues to climb and account for more and more of the issuance coming from the Treasury. President Day, how does that view, How does that change your view on what to do and what not to do with policy? What does it mean for the everyday workings of the Federal Reserve, who is very focused on managing short term rates.
00:07:58
Speaker 3: Well, I'd say these are early days, and I wouldn't want to be preemptive and sort of discussing those types of things until we've had a chance to think through those issues. But the Treasury Secretary is different than the Fed. The Fed is talking about price stability and full employment. And what I do know, and we've historically been able to do this, is that we have a goal and we can achieve those goals through our policy implementation, and we will find a way to do the job that Congress gave us, which is restore inflation to two percent as our goal as we define it, and do that price stability. So I think we don't want to worry about the mechanics of how to do that as much as the commitment to achieve it.
00:08:38
Speaker 2: Forgive me for going there, but it's in conflict with what you're trying to achieve when.
00:08:42
Speaker 3: You see the treasure rates at this point. I ultimately I think this is really important, but it's the Treasury Secretary's job, not the federal reserves job, and we have our own job which is very important. But also we're not quite there yet, So I'm going to focus there.
00:08:57
Speaker 2: The Treasury Secretary at the moment, and you'll forgive me for pushing, is actually trying to influence financial conditions. You could see that yesterday yields came in. You could see the dollar weaken as well. Given the moves happening Gauseware and financial markets particularly and crude. You do have to wonder, President, and if that's an increasing challenge for the Federal Reserve that they might have to confront.
00:09:18
Speaker 4: It sounds like that's something you're interested in.
00:09:20
Speaker 3: But again, I really am in the work for the Federal Reserve, and I think importantly, you know what, and I'm pushing back in this, the important thing the American people need to know is that the Federal Reserve cares about its independence and its credibility and sticks to its remit. You know, we take in all the information, we look at everything, because those are important inputs, but we know what our job is and we focus.
00:09:42
Speaker 4: On doing that and that.
00:09:43
Speaker 3: You know, if you want to talk about inflation, compensation and expectations and FED credibility, I'm happy to talk about those things with the labor market. But I really do think that with our job right in the importance area here and we aren't meeting our target yet, we really have to focus there.
00:09:59
Speaker 1: President, how would you characterize right now the overall economy? And we've talked about how there is this sort of heat coming, but right now, do you think that it's solid, do you think it's expanding, or do you think that it's decelerating.
00:10:12
Speaker 3: You know what I'm really seeing and it's an interesting time. You know, I think people say it's confusing, there's contradictory data. It is true that the typical historical ways we think and measure the economy, the dynamics, and the inter relationships don't seem to be squaring up like they would typically do. So then what do you think? What do you look at when you talk to businesses. They're cautiously optimistic, and they're cautiously optimistic beyond the AI sector where they're just optimistic and they're optimistic. They think of this, they call it an industrial renaissance. We are in the next industrial revolution. So they have all that enthusiasm. But what I really watch is what are other businesses saying? What are other businesses thinking? And they're focused on the fact that consumers are trading down and feel a little bit tighter in their pocket.
00:11:00
Speaker 4: Books, and they're spending.
00:11:01
Speaker 3: But they're also focused on they keep coming to their business, they keep wanting to do things, and importantly, I start to see these businesses. I'm seeing these businesses using AI really working hard to see how can this technology, which is in the development stage, really how can it affect their business processes, even the physical world that they work in, and what can they do to make things better. So I'd say that there's this all this enthusiasm about the future and a lot of anxiety about the present, and that is a colliding piece. Now, if you talk to the consumer, they're still there. They're still spending, although it's slowing and they're trading down, but they do feel more precarious. You can see that in the sentiment surveys either of confidence or workers.
00:11:47
Speaker 4: And I think it's in this.
00:11:48
Speaker 3: Low fire, low higher environment that they feel. It's an uncomfortable stability. It's an uncomfortable stability that we're not really accustomed to.
00:11:57
Speaker 4: But the policy maker is a policy maker.
00:12:00
Speaker 3: We have to ask, is it sending any weakening signals? Do we see any sense that things are fragile? And I just don't see that yet. And you saw that in the claims data today. You just don't see signs that the labor market is faltering. You simply see signs that it's running around at.
00:12:17
Speaker 4: A very low level.
00:12:19
Speaker 3: And the most important question I'm asking CEOs right now about the labor market is where are your cutting back plans? You're in a low hiring, low firing. But do you have those plans moved to the front of your desk and are you watching them carefully? And right now they're there, They know what they would do, but they still see that cautious optimism of.
00:12:39
Speaker 4: Trying to meet output growth.
00:12:41
Speaker 3: Where it is and be not the last in line to do that, the first in line.
00:12:44
Speaker 4: To do that.
00:12:45
Speaker 1: President Daily, you mentioned artificial intelligence and the idea that a lot of these companies are trying to deploy AI tools and lots of creative.
00:12:51
Speaker 4: Ways right now.
00:12:53
Speaker 1: Is it still more inflationary that it is disinflationary in terms of productivity? Is that something that the FED needs to combat or address or is that something that the FED can look through with the hopes that there will be more productivity on the other side.
00:13:09
Speaker 3: This will all come down to something that we have to watch, which is is this a relative demand chock? Is it changing the relative price of technology goods or is it spreading more generally into think of data center buildouts. Is that pushing up the price of construction workers everywhere or is it simply you know you're getting specifically trained people or people are coming to do those things. Right now, I'm not seeing a broad spill over in the broader inflation measures. I am seeing a rise in software and technology goods. Those are pushing up, but that's a relatively small sector of the overall price indices, and so I haven't seen evidence of that, but that's what we would have to watch. And so the investment growth is very very strong, and that's affecting interest rates as you see long data yields, but you don't see that pushing itself into price inflation writ large, although you definitely see it. If you're trying to buya high and technology good you.
00:14:01
Speaker 4: See some effect there.
00:14:02
Speaker 3: So we'll watch that whether that spills over into consumer prices, consumer goods and services. So far haven't seen a lot of that, but we will. That's definitely if you if your coffee maker starts rising in price because the chips that go in, and if you buy one of those new fancy ones, then if that starts going up, that's a sign of broader based problems or audible biles.
00:14:23
Speaker 4: But yet we haven't. We haven't seen that of yet.
00:14:26
Speaker 1: President Daily, You've mentioned that policy is in a fairly good place right now as all of the members look at the incoming data Is there anything that's transpired that makes you question that, or has the data been more of the same to indicate that the FED is in a good place to keep watching the data for a while longer.
00:14:45
Speaker 4: I'm on the latter point you made.
00:14:46
Speaker 3: I think we're still in a good place to keep watching the data. As I mentioned, you know, the two prints that have come out on inflation and the labor market didn't make didn't really clear much up for me. You know, I'm not going to get on the bandwagon of c we had a softer inflation print, we should stop worrying about the risks of higher inflation. I don't think that's right, and I don't think the labor market print suggest that that there's any impending weakness there. But we have to continue to watch these things, and importantly, I think with inflation, elevate it for as long as it has been, we have to constantly discipline ourselves to watch what's happening to inflation expectations, what's happening to producer instinct to raise prices?
00:15:27
Speaker 4: Are they able to right now? They say they're not.
00:15:29
Speaker 3: They're really not pushing all their input cost increases through to prices. Consumer prices So those are the dynamics to watch and continue to watch the labor market. But if I look at the two we are missing on our inflation goal quite a bit, and the labor market is relatively stable. So a lot of my attention is on that inflation miss and how to get this back down to two percent? And when do I have a sufficient amount of confidence to say we're on our way right now? I think that's the motive view, but I don't think it's so modal. There's the probability isn't so large on that front, and you can't watch these risks.
00:16:05
Speaker 2: I mind the penalty books now, I feel like I might be you.
00:16:08
Speaker 3: Could ask her, so you're not in the penalty box.
00:16:14
Speaker 2: You always try it. I'll always try. Mary is good to see. Thank you, the San Francisco to marry Daddy.
00:16:19
Speaker 4: Thank you.
00:16:21
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Nidia Richardson of ADP listening to that conversation, she joins us now in anticipation of Jackson hawaiiming and the annual FED get together next week, Nida, welcome to the program. How much pressure is on this institution heading into next week's get together.
00:16:46
Speaker 5: I think they're under a lot of pressure because it's coming from all directions, and some of the pressure is solvable, and some of it, frankly isn't. Tensions in the Middle East not solvable by the Federal Reserve. But what's going on get to the two and a half percent target. They're making good progress, and that's good news. But I want to draw a sharp distinction between what's good news for the markets and what's good news for the worker, because that has been growing in the gap. We have a new paper out just this week showing that. So I think the Fed has a lot of different pressures, and not all of them they're going to be able to resolve.
00:17:23
Speaker 1: Neila, One thing that the paper that you're talking about pointed to is this idea that wages really have not kept up for a significant proportion of overall US workers with the pace of inflation over the past five years. I just wonder whether that can continue without a downturn and consumer spending. Can you see an absorption of additional price increases if you don't have wages keeping pace.
00:17:46
Speaker 4: Yeah.
00:17:46
Speaker 5: My colleague Lee Wang and professors Eric Hers and Christina Patterson looked into sixteen million workers between twenty twenty one and twenty twenty four. To answer just that question, you know, when wages sore pay did not keep pace. And that's because employers, so those very employers that the FED is listening to, tend to have structural permanence in their wage increases. They all tend to give about the same amount of wages to the same amount of people. It's usually about three percent. It's usually whole numbers. And when inflation is sourced to seven percent, workers lose ground. And when those inflation shocks are unexpected, that loss approaching seeing power can persist for years. Fast forward to just last week, we saw consumer sentiment fall by twelve point four percent, and where was it The largest older workers who are least able to keep up with inflation increases for a variety of reasons. And so when you circle back to the FED and what really the inflation backdrop means for the consumer and the household, you have consumers whose wages are just not keeping up from past inflation, let alone current bouts of inflation that we're seeing right now.
00:19:06
Speaker 1: You know what happens when you include people who change jobs and maybe got a pay increase.
00:19:11
Speaker 4: That's the power of the worker.
00:19:13
Speaker 5: That's the only way really that workers can really use their leverage in the workplace to outrun inflation. We saw them, we called it the Great Resignation, and we saw that workers were switching jobs. But guess what, these were low wage workers mostly that were able to take advantage of it. They were The advantage didn't last long because once you switch a job, you're still stuck in that permanent, sticky wage increase, and so it didn't have lasting effects. Thirty seven percent of workers, whether they switched jobs or stayed, saw real wage increases in those four years, according to our paper. And that's why when you go back to the Michigan sentiment survey, only eight percent of respondents said that their real incomes are going to keep up with inflation.
00:19:56
Speaker 4: That's a very low number.
00:20:00
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Stocks failing to hold onto gains as bond yeards continue to climb. Mana. Mahajanabedwick Jones writing, the Treasury announcement may help ease near term liquidity pressures and improve market functioning. However, it does not address what we consider the key factors driving yields. Many joins us now for more man, welcome to the program. Look, it's easy to get dramatic whenever we see yields start to drift higher. But how concerned are you about what's happening at the long end of this yield curve?
00:20:38
Speaker 4: Yeah?
00:20:38
Speaker 6: You know, Look, I think we have seen the tenure over this cycle over the last several years hit a five percent plus level. It didn't stay there long. But could we be heading in that direction? Absolutely? And I think that is really kind of the line in the sand for a lot of investors. At that point, some quantitative investors do tend to step back into the market. But could this time be different in that we have no resolution to your point earlier on the fiscal deficit, we have a massive amount of AI issuance and supply coming to the market, and by the way, global yields are trending all in the same direction. Now, keep in mind, what does rising yields.
00:21:13
Speaker 4: Do to the real economy?
00:21:14
Speaker 6: Well, yes, it pressures puts upward pressures on costs, cost of borrowing for consumers, for corporations, but it also creates an alternative to equities. And keep in mind that old adage there is no alternative. Well, now, with thirty years at five plus percent and the ten you're at four point seven or so, could there be an alternative for those that are seeking yield, maybe in retirement, near retirement, or just looking from income opportunities that we think is the silver lining here for those that are looking for relatively risk free income opportunities versus what we've seen in this rally in equities. There could be some opportunities on the horizon.
00:21:53
Speaker 2: Here following this take for take now it's now a seven basis point move for the long end. I think it's fair to say based on where we were at eight thirty East and yesterday morn we've taken back all of the move post the announcement at eight thirty from the Treasury. Let's just stay on that. Because of all the research we've all read in the last twenty four hours, most of it talks about twenty twenty three and echoes of twenty twenty three and the moment you got the scent, the whiff that Yellen was blinking, that was the moment to buy. There is a group on Wall Street that suggests we've just seen that moment from Treasury Secretary Scott Best and there's another group on Wall Street that says, this is a very very different unforgiving bond market bank drop, it requires a much bigger solution, which camp you in.
00:22:34
Speaker 6: Yeah, you know, look, I think this administration actually is quite focused on the yield picture. And we saw it last year too, when TIFFs were creating a massive amount of uncertainty. Wasn't the equity market selling off that created this or cause it this administration to blink? It was actually bond yields moving higher. And so this administration in particular is quite sensitive to this rapid move higher in yields, and it is actually taking steps to try to kind of reverse some of the function we're seeing now. All that being said, to your point, this is putting a bandage on a very very much bigger problem. And so you know, increasing long year yield purchases from two billion to four billion in a twenty trillion plus economy doesn't.
00:23:16
Speaker 4: Really do much.
00:23:17
Speaker 6: And so what we really need to see is the structural change that we are all talking about. But no administration historically has taken on that task, and so I think that's a tall order.
00:23:28
Speaker 4: All that being.
00:23:29
Speaker 6: Said, we are also in an economy where we are seeing massive secular tailwinds from AI, their earning story remains intact. We've seen Atlanta fed GDP now at four percent, and by the way, the consumer, despite some of the near term headwinds, has held in there, especially that upper income consumer, and so not an environment where we are seeing yield's rise and a recession on the horizon. So there is still opportunity, we think in the equity market, and maybe some opportunity for those yield income consumers as well.
00:24:02
Speaker 1: So you're still bullish despite the fact that we've seen yields rise at the long end.
00:24:06
Speaker 6: You know, overall, we think the backdrop of this macro backdrop has not shifted, and we do think that equities make a lot of sense here now to your point earlier on seasonality, we had a really nice run in equities through June and July and early August, and we're heading into September and October, which historically have not been great months for the equity markets. But keep in mind we're also in a midterm election year, and historically post midterm elections, equities tend to rally as some of that uncertainty is lifted. So could some of this play out you know, history doesn't always repeat itself, but it could rhyme to some extent.
00:24:42
Speaker 4: These could be issues that we face in the near term.
00:24:45
Speaker 6: But we'll have to see how not only the treasury market plays out, but how the FED reacts to some of what we're seeing. Do they think that the treasuries are doing some of the work, some of the restriction for them, or will they have to act regardless, And that could really be the game changer in terms of how equities play out.
00:25:02
Speaker 1: So in other words, Mona, you don't see the rise and long end yields necessarily affecting the overall dynamic in terms of being bullish of both equities and maybe short end bonds. But if the FED takes action hikes rates, that's the game changer. That would make you more negative on stock, so to make you more positive on bonds.
00:25:21
Speaker 6: You know, I think generally with an earnings back drop of thirty percent this year, it is tough to fight the tape. In terms of what's happening in the equity market, if the FED has to raise one or two times, we don't think that derails the broader story. Now in terms of yields, you know, our team is looking at ten years between four and a half to five percent. If we get much above that, we could reconsider our stance on equities as well. As we noted you know there's an alternative. Then the evaluations come under pressure. There could be a shift in the narrative, but for now we remain contained in that four and a half to five percent yield range. We have the strong earnings drop supporting US and the Fed by the way we think is torn. We've seen a couple of better than expected inflation prints, we'll get one more on September eleventh before the September sixteenth meeting, and we've seen a labor market and consumer that has really been mixed. So not one where the Fed may want to continue to put pressure on and cause some other concerns in the macroeconomy as well.
00:26:20
Speaker 2: Mana, it's got to see you to get your reaction. Mana Mahajan there at Edwick James. This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, an gio 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.
