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This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. 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.
Let's turn to the economic policy. Fed Chair Jay Powell emphasising a central bank is in wait-and-see mode. Pending trade negotiations. Nouriel Roubini of NYU Stern is saying no pain, no gain. American democracy will survive the shock. And after an initial period of pain, the US economy will thrive. Nouriel joins us now for more. Nouriel, good to see you.
You're often painted as doom and gloom, the big bear, but I've spent many a time with you and we've had conversations where you're constructive and it feels like this is that moment. What are the factors that lead to that constructive view for you? Well, I've recently said that tech trumps tariffs. And what I mean is that the US is really number one in many of the technologies of the future. AI, machine learning, robotic automation, semi-automatic.
Fusion, Quantum, Defense Tech, Green Tech, Ag Tech, FinTech, you name it. And I expect that actually US potential growth because of that could increase from the current 2% towards 4% by the end of the decade. So that's a 200 basis points increase in potential growth. Even tariffs, and there'll be some de-escalation, restriction migration, best estimates that they could reduce potential growth by 50 basis points. You have 200 on the plus, 50 on the minus. So there's a ratio between four to one.
So I think that that's why that over the medium term, the fact that the U.S. is very innovative implies that whatever Trump does doesn't matter. So tech, Trump's tariff, tech, Trump's Trump tool. And the traders, of course, Trump, and they force them to back down through market discipline. The most powerful people in the world are the bond vigilantes. So the thing is boxed in. There'll be de-escalation. We'll still have an inflation rate. I expect that the trade deal will imply that
for most of the world you have tariffs between 10 to 15 percent on China 60 but even with 10 and 60 that is what actually Trump was announcing in the campaign trail you get inflation and core PC towards 4 percent by the end of the year that's a to disposable income you have weakening of consumer and business sentiment you get a short and shallow recession by q4 this is gonna be short and shallow because then the Fed is not cut rates since inflation expectations are the anchored but will ever
we'll have a short and shallow recession by the end. That's probably highly likely. Can I jump on that point? What gives you the confidence the Fed can respond to that? Because there are some people who are worried about the inflation that might pick up and the fact that might constrain the Fed's dovish bias. No, you're right. That's why people are already saying they should have cut in May or in June or July. I don't think it's going to happen before September.
Because as Powell said yesterday inflation will be higher unemployment is going to be higher last time around they made a mistake they thought that the increase in inflation was temporary and was not and then they had to Catch up on it and so on so this time around you can make the arguments that since inflation expectations are anchored since the Fed is not wimping out and Force being forced by the White House to cut rates right now when inflation rises gonna be a level effect rather than a
rate of inflation. If inflation expectation remains anchored, if you don't have second round effects, then once unemployment rate goes higher, that weakens the labor market, then the Fed's going to feel comfortable to cut rates. But right now they have to stay on hold exactly because they need to cut once then the economy weakens significantly. People have been talking about stagflationary-like scenarios, that growth is slowing. And as you acknowledge that that would probably have
to some degree in the near term and that inflation was going to remain higher as some of the trade arrangements get readjusted. Why is that not a significant concern for you at a time where even the Fed seems to not have clarity on whether that's going to be the predominant theme? It's inflationary. Growth is going to be lower. Near recession, inflation is going to be higher.
I think the difference between now and say the 1970s when you had the old shock of '73 or '79 was the inflation was already high and rising and the Fed was behind the curve and then you had the anchoring of inflation expectation. This time around, I think they have shown some credibility in anchoring inflation, inflation expectation.
You're right, however, that you never know. Second round effects may occur. You have not only the impact of the tariffs, now the dollar is weakening, that's another impact on import prices. That's why the Fed has to wait until the hard data show that there is a beginning of a recession. If they start cutting rate earlier, then you have the anchoring of inflation expectation and that's going to be a problem.
How much are the Fed's hands tied? Because the long end of the yield curve is not necessarily anchored to Fed policy in the same way, especially given some of the deficit concerns. And I know that that Congress member wanted to talk about what was going to happen with the total pool of debt, not the debt to GDP. But I'm actually curious about how they issue that debt and just what that does to some of the yield premium going forward.
Well, the long end depends on the Fed in terms of inflation expectation and depends, as you point out, risk premia or term premia on fiscal policy. I think the administration is sensitive to the idea that if you have a very large deficit, eventually bond yields can go higher. They can further crowd out the economic recovery.
And we'll see the results of this fiscal plan. Some of the stuff they're doing are going to increase the deficit. Some of it, like tariffs or reduction in IRA subsidies, Medicaid, those cuts will reduce the deficit. I think they'll be quite sensitive not to have a headline number for deficit next year. It's higher this year because then, well, you have to go much higher, and that's going to hurt further the economy. But because you're going to have a fiscal drag, I think most likely next year, then the Fed has room for easing a little bit more
Now they want to start also manipulating the
long end of the bonding curve. I wrote this paper with Steve Miran criticizing what Yellen was doing by reducing the supply of long debt and issuing more of the short one. But this time around it's not just the ratio between the two, they're talking about buybacks. Literally buying more of the long term to get it out of the market to issue more of the short term. That is doubling down on these ETI policies. Just doing more of it actually, rather less of it. - Nouriel, there's only one person I know with more air miles than you and it's our friend Mohammed El-Erian. You travel the world.
a ton. Have attitudes towards U.S. assets changed? Have the conversations shifted in the past few months? They've shifted, but I would say there's going to be a difference between fixed income investors. Many of them can be sovereign, either central banks or sovereign wealth funds.
uh these folks are worried about the deficit are worried about us having damaged the credibility of the united states that's why you had higher bond yields and weakening dollar so that trend may be continuing because they're going to have to get out and the rivals of the us like china they have to get out of dollar assets probably going to go into the gold and things of that sort but my view is that since there will be an investment boom driven by this increase in productivity
CapEx in the United States is going to be much higher. The current account deficit is going to become larger, even with the tariffs, just because investment is going to be higher as a share of GDP. Savings are going to remain low because private and public savings will be low. So our current account deficit is going to be wider, but the inflow of this financing is going to be both FDI and portfolio investment into equity market.
So you have actually more even overweight in US equity assets over time because of the increase in cycle. Can we just say on that, this is really important. So we've been debating now for a number of months about whether this was a cycle level shock or a system level shock. The policy announcement of the last month. And we wondered whether that structural long into the US dollar, which is a system level story, would be disrupted. Are you saying that will stay the same? That you'll just see this flood of money keep coming in to the United States into US assets?
As I said, in fixed income, maybe people are going to try to get out, especially if the deficits are larger, unless bond yields are much higher. But I see an investment boom in the United States, an increase in productivity, secular boom, and therefore being overweight in U.S. equity is going to become the story over the next few years, and that's going to compensate any exit out of fixed income assets. So the dollar is going to weaken, but it's going to weaken gradually.
and the reserve currency role of the dollar is going to be dented but not damaged to any significant extent. So we can live in a world in which actually the US current account deficit is going to be much larger, but driven more by booming investment rather than weak public savings. The dollar remains strong, and we're going to live with that because there'll be strong economic growth. You mentioned some of the diversifying that you could see away from the dollar to things like...
Any of the thoughts on where that money might go beyond just gold? Well, you know, if you're a rival of the U.S., say China, if you dump your treasury, first you have a mark-to-market loss on the value of those things. If you sell treasury and buy RMB, you appreciate the RMB, something you don't want to do.
If you sell dollar instead of buying RMB, you buy yen and euro, you appreciate the yen and euro and you upset the Japanese, the Europeans, you want to have good relations. So what do you do? The best thing you can do is to sell treasuries and buy gold and that's why gold has been going higher.
Because gold is the only reserve asset that cannot be seized. Because we've seen in Russia, Ukraine, that even yen, euro, Swiss franc, pounds can be seized. So I would say gold being the biggest winner. Now, over time, of course, the Chinese want to have a new rail of payment systems that is bypassing the U.S. dollar and SWIFT. And there are now technologies that gradually, over time, are going to allow them to do so.
But I think it's going to be a very gradual process. So the dollar is going to remain meaningful global reserve currency. Nouriel, super thoughtful as always. It's good to see you, sir. Thanks for dropping by. Nouriel Rabbini there of NYU Stern.
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The Fed Chair Jay Powell emphasizing a wait-and-see approach as a growing chorus on Wall Street lifts recession odds, citing tariff-related stagflation concerns. Joining us now to discuss is the former Kansas City Fed President Esther George. Esther, welcome back to the program. It is the central banker's dilemma, the prospect of higher inflation, higher unemployment, and decelerating economic growth. It's a challenge. What did you make of the chairman's ability to rise to that challenge in yesterday's news conference?
Well, I thought based on what I heard in the market reaction, he stuck to the story that he's been telling, which is we're holding these rates until we can get more clarity about the policy mix. And I also heard in his comments something interesting. He certainly highlighted tariffs. That's been the topic of the day.
But he also mentioned we have to think about the impact of immigration policy changes, fiscal policy changes, and this emerging prospect of how regulation might change around this. So that is a pretty big dynamic.
to try to play out when you're judging the appropriate stance of monetary policy. Esther, do you have a better sense of what the reaction function is when it comes to looking at different indicators, whether it's soft data or hard data, and understanding how the Fed would prioritize certain readings, how they would respond to, say, an increase in unemployment, if also it came in tandem with increasing inflation?
So I think, Lisa, the soft data is really important right now. And you do see the Fed looking at that. You see that come through in the Reserve Bank's Beige Book data. You know they are out there really just combing the landscape to hear from different parts of the economy.
what they expect and i think what they're hearing right now is we're not sure we are we are pausing we're waiting the fed knows that even pausing has a negative impact on the economy
But I think for the U.S., we've come into this at a time of strength in that economy and judging how much will come off of growth, how much will hit the employment numbers, and certainly watching inflation expectations at a time like this.
are a dynamic that just takes time, I think, to figure out. Yesterday on Bloomberg TV, Bob Michael of JPMorgan Asset Management noted that the word transitory was used as recently as the March 19th meeting, the last time the Federal Reserve met. Do you think that it was a mistake for them to say that? It was notably absent from yesterday in reference to any kind of inflationary impact from the tariffs that have been put on.
Well, I think it probably was intentional to drop that word. It has taken on some very negative connotations, maybe rightly so. But the truth is, we know that these kinds of shocks can be a one-time price level shock. I think what we can't know right now is the fact that we already have elevated inflation relative to the Fed's target.
We know that certain measures of inflation expectations are moving in ways that flash caution. And so
I think you can't know how this dynamic unfolds with inflation without a little more sense of when these policies get better able to be quantified and put into the models that the Fed's looking at to know. Not if. I think this is a Fed that is clear we are on a cutting path. We've taken a pause. It's really a question of when. How do you know, Esther, the difference between the two?
Because clearly the committee struggled with what was transitory and what wasn't coming out of the pandemic. So how would they know the difference this time around? The difference between inflation being short-lived and more persistent? Do you just have to wait, wait a long, long time? How do you know the difference?
Well, you absolutely cannot know the difference. And that is really the crux of uncertainty for a policymaker is to read into this whether you will continue a disinflationary path, that underlying sense of inflation where we were.
and really watching inflation expectations. So for me, I think keeping an eye on those inflation expectations will tell the committee a lot about what they're dealing with relative to a one-time versus a more permanent impact to inflation. - And Esther, just to double down on that, do you put more weight on survey-based expectations or market-based expectations?
Well, I think you have to look at both. And normally you might say that some of these household survey measures and other things are not so definitive around where inflation is going. I think what's gotten my attention this time is how dramatically they are moving. And so that in and of itself tells you that the volatility you're dealing with has
has to give you some pause. And I think it's right for the Fed to pay attention here to how these dynamics are unfolding. And that's certainly what they're doing. Esther, I appreciate your take, as always. The former Kansas City Fed President, Esther George, on the challenge this Federal Reserve faces.
We are all in wait and see mode, including the Fed Chair, Jay Powell. Claudia Sarm of New Century Advisors writing the following, I agree with the Fed's decision to hold rates and flag the risk of higher unemployment and inflation. However, it was a missed opportunity to lay out how it plans to decide whether tariff-induced inflation is temporary. Claudia joins us now for more. Claudia, welcome to the programme. Let's build on some of that. What would you have liked to hear specifically from the chairman in that news conference?
I'd like to hear their framework, what kind of data they're looking at, how they're going to move back into some forecasting, right? Like, what is it they're going to use to... It's clear that the Fed, or at least Powell, has not... They're not embracing this, it's a textbook case. Inflation, when it's because of tariffs, it's temporary. Now, we do hear Governor Waller making that case, we've got to be brave and it's temporary. We need more than that, right? Like, what are they looking at in the data? And this is where I think I, you know...
looking more broadly, not just the CPI, the labor report, but how are they using all these surveys of businesses, the surveys of consumers, that soft data that seems somewhat maligned? Like, what are they going to use to make that decision? And I just...
I mean, I know that they must be doing that work. It's just, I think sharing more of that before we actually get to the position where the dual mandate is in conflict would really be helpful as a guide. Claudia, do you agree with Fed Chair Jay Powell that there isn't that big of a cost to waiting?
I mean, the Fed's tools work with a lag. So, like, there are costs to waiting. Now, I agree that at this moment, it's too fluid, right? And this is a historic shock that is facing the economy. And businesses are just starting to work through it. And it could go in a lot of different directions. So, again, I understand why this is a moment where, you know, holding makes sense.
And yet, like, there are costs to waiting. And I think one of the issues I really took in the press conference was how, you know, reinforcing, well, but the data are fine.
you know the the inflation's fine the unemployment's fine what like the data are not fine right if we look at say into the first quarter GDP that surge in imports that is telling us this is a really big shock that's coming at the economy this is out of expectations businesses are pulling in
rushing imports, probably building inventories, that all comes at a cost. And remember, what we thought in the first quarter was going to be the tariff increase, it's actually worse now. So, like, it's already here. People are changing behavior. No, it's not in CPI. No, it's not in the unemployment rate yet. But it's coming. So, you know, prepare. You can wait, but you really need to be prepared.
There was another aspect of this press conference that I found particularly interesting and it was when Fed Chair Jay Powell said that the 2024 rate cuts were not preemptive. If anything, it was a little late and of course this is referring to the unemployment rate that had increased
by a half a percentage point, as the SOM rule dictates, your rule. And they did respond, and then some of that data was revised upward, actually. What did you make of that, that comment that if anything, we were a bit late?
I don't think they anticipated going straight up with 50 basis points. I think the 50 basis points was a catch up that they should have started one meeting earlier. I think that's the late. And it's because they weren't reacting to the bottom falling out. It was a we don't want to see further weakening. So I think the Fed probably would have preferred to have had that in, you know, more spread out in like 25 basis point increments. But it
I think that's where it came from, but that's such a fine point on timing. So I can understand why that seems a little muddled. I think it's important to go back over it though, Lisa. I'm pleased you brought it up. We've had so many guests say this Fed is willing to be late and we're all struggling to define what late is to the Federal Reserve. If last year was late, I think the market would take that. Is that late?
100 basis points in the summer, a little drift tire and unemployment. Yeah, if that's late, that is the most dovish message you could possibly send because that means that being late means being on time for a lot of other people. That seems to be my take. Claudia, you're one of the best. Always clinical. Appreciate your time. Claudia Sam there of New Century Advisors.
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Yeah, I
It's a difficult question, and Tara Powell was asked that exact question, and he didn't give a lot of guidance on that. I don't think he ruled out a cut in June. I don't think he ruled out really anything. He created max optionality for himself, which he's become very good at doing. I mean, if anything, I look at the reaction of the bond market to the meeting, and I think it's spot on exactly what he wanted, which is very little movement at all.
all so kudos to him let the policy and the shifts in policy drive the bond market not the Fed right now because just just like the market the Fed is waiting for more guidance on what's coming next let's build on that you went to the bond market what's it signal about that debate about whether it's short-lived or whether it's more persistent there are different ways to gauge inflation expectations survey methods market based expectations what's the market signaling to us
To us, it's pretty clear the market is signaling that this is going to be short-lived. And the repricing within the inflation market tips, break evens, falls inflation swaps has been very efficient. Efficient meaning that the inflation impact is really concentrated to the next 12 to 24 months.
And then beyond that, you're seeing very little impact. If anything, the market is pricing in a probability that beyond the next 12 to 24 months, inflation actually falls below target. Because ultimately, what we're thinking about here is, what are tariffs ultimately? They're a tax on the consumer.
They reduce demand and ultimately that's something that weakens the economy, weakens prices, not the other way around. I'm looking at the cuts that other central banks around the world have made since the middle of last year. The ECB, 175 basis points. The Bank of Canada, 225 basis points. After this morning, the expectation is the Bank of England will have done 100 basis points like the Federal Reserve. Is there a world...
in which it could be disinflationary these tariffs for the entirety of the developed world but not the United States. In the short term probably but in the longer term I do think that you are going to see the negative demand impulse overwhelm the short-term impact of tariffs.
I think it's really interesting what you just said, highlighting that other central banks around the world are continuing with their easing policy. I was just checking before I came on today what the return on the global bond index is year to date. So the U.S. ag is up about 2.5%, pretty respectable given the volatility, so still working as a diversifier in your portfolio. The global ag is up 5.5% year to date.
I think people really underappreciate that, but there is quite a lot of opportunity outside the U.S. in terms of developed bond market, government bond markets. And also other central banks, the tradeoff is much, much less ambiguous. It's much more clear.
The growth aspect and the inflation aspect are telling them to continue to cut rates, which is what we expect the BOE to do at 7 a.m. This is the reason why the wait-and-see for Fed Chair Jay Powell is a reason that a number of investors around the world are increasingly looking elsewhere other than the United States because wait-and-see is not a good strategy for investors in a lot of ways. Steve Major over at HSBC said this morning, we prefer taking duration exposure in the U.S.,
and stay neutral on U.S. Treasuries as they wait for some of the policy uncertainties to subside. Do you agree with that? Is that kind of what you're thinking? Yeah.
I would say in general, I think longer dated yields are somewhat range bound here. We've had a range for the 10-year treasury of around 375 to 450. So we're on the higher end of that range. And what that means is that there is some asymmetry there. For example, if we did see an increase in initial jobless claims at 830 this morning, we would expect there is significant room for yields to move lower for the market to price in a more aggressive Fed cutting cycle.
I think that the market has been fairly stable. It's been consolidating in a narrower and narrower range. And ultimately, what's going to break us out of that is going to be an indication on policy, whether it be fiscal policy or trade policy. I think one of the things that is going to become more of a focus, so far, trade policy, we had the escalation aspect of it, and then when is the escalation going to stop?
We got peak escalation. Then we are on the de-escalation train. What I think people need to start focusing on is where are we going to end up? What is that effective tariff rate that we're going to settle at? The negotiations today with the UK are going to do essentially nothing to change that effective tariff rate. It is still on track to be extraordinarily high. So while maybe this is good news, I'm not necessarily sure it's a roadmap for the rest of the world.
And really, what will be driving sentiment in the market as we turn to the next week will probably be more likely the negotiations with China over the weekend. Kelsey, appreciate the update and the reaction. Kelsey Barrow of JPMorgan Asset Management, framing things, I think, quite well.
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