Bloomberg Surveillance TV: June 11, 2025
32:07 Share

This is an iHeart Podcast.

As a global leader in alternatives today, PGM is capturing the potential of tomorrow. So as you look to diversify your portfolio, PGM offers expertise in seeding, developing and managing a broad range of liquid and illiquid strategies. With over $320 billion in alts across public and private markets, we are helping clients achieve their long-term goals. PGM. Our investments shape tomorrow, today.

Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future.

while also creating opportunities to give back along the way. Visit Thrivent.com to learn more. Thrivent, where money means more. Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey.

With smart business buying, get everything you need to grow in one familiar place, from office supplies to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon, plus tools that help you save costs and make insights-based decisions. Ready to bring your visions to life? Learn how at amazonbusiness.com. Bloomberg Audio Studios. Podcasts. Radio. News.

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.

Torsten's lock of Apollo writing the consensus expects inflation to rise in the US but fall in the eurozone. Torsten joins us now for more. Torsten, let's focus on the US side of things and then we can get to a more global dimension. Let's focus on the US with the tariffs in mind. Is it too early, Torsten, to expect those tariffs to show up in the data this morning?

No, it's not. What really is the key issue here is that there is indeed going to be some upside pressure on inflation. And what's most critical about this is that it's all about the behavior among companies. How do they respond to tariffs? Do they pass on 100 percent? Will they pass on 50 percent? Or will they pass on nothing? If they pass on nothing, of course, then tariffs have to be absorbed by the E and the P/E ratio, namely by earnings.

So it becomes very important the data print today and for the coming months. And we should expect to see some upside pressure on inflation coming from tariffs. But it's also the upside pressure we're watching that's coming from what's going on with the dollar. The dollar is down quite significantly since the beginning of the year. This is also beginning to creep in.

as a risk to the upside for inflation. And finally, the other thing that's also beginning to become a risk is that the restrictions on immigration we saw last Friday, some upward pressure on wage inflation. This is also something that's an upside risk to inflation over the coming months. So the bottom line to your question, Jonathan, is that we should expect to see from a number of different forces upside pressure on inflation for the next several months, including in the data today.

Will it be sustained beyond the next several months, Torsten, as you alluded to? As you indicated, that is the key question right now, the central question for a lot of people in financial markets. What is on your dashboard that guides that for you?

Well, my dashboard is to type ECFC go on Bloomberg and look at what the consensus is expecting. And that will tell you that CPI is expected to go up from 2.6 to 3.3 by the end of the year. So that's roughly a half a percentage point increase in inflation. And that's the same for core PCE and for headline PCE. So the issue there is that we should expect to see this take quite some time because it all depends on the company's behavior in terms of when do they begin to implement what

higher prices on the back of the patient going up and that is something that in the profile inflation on a big was the pushes us up above 3 percent and this is very important because the starting point if we have started with inflation today at one and a half and we are having to send then we get much closer to the feds target but the problem is that the levels were at 2.8 on inflation today is already at the level that is significant above the feds target to if you add a shock

of lifting another half a percentage point to inflation that really complicates the Fed's job and therefore makes it very difficult for them to cut rates in an environment where there's so much upward pressure on inflation.

So, Torsten, in an all other things being equal world, right, when you slap a tariff on the price of those goods move up, I think that's clear. There are some offsets though potentially. I'm interested in your thoughts there. One, right, energy prices have been lower now for a kind of sustained period of time, so there's some disinflationary potential there. Also, the ISM service number last week came in below 50, and so there's some signs of slowing in the service economy.

How do you think about some of those potential offsets and do you think they're enough to maybe stunt the impact of what you're expecting from a tariff perspective? No, you're right. From a growth perspective, lower energy prices are certainly helpful. But core PCE and core CPI, of course, excludes food and energy. So from the Fed's perspective, they would likely focus on that there is general upward pressure in the broader measures of inflation, excluding food and energy. And to your services, it's right. NFIB has been showing some upside pressure also

on the expectations to inflation. There's also some measures, of course, of inflation expectations, both from the University of Michigan and the conference board that is also telling you that inflation expectations are way too high relative to where the Fed would like them to be. So you're right. There are some nuances in terms of, yes, there are different things going on in some of the especially survey based data of what's going on with inflation, especially when it comes to household expectations being very, very high. So combined, I would still come to the conclusion that I worry

more about the upside risk. This is also what the Fed has in their own forecast. That's what the consensus is forecasting. That's also what we're forecasting. So for what it's worth, I still think that the overall risks, yes, surveys may show that ISM was a little bit weaker when it came to prices paid. But the bottom line is that the tailwinds coming from tariffs, coming from a lower dollar, coming from restrictions on immigration are just pretty strong. And that's combined with at the same time a slowdown in growth, partly because of tariffs, of course, also weighing on sales for companies.

but also a slowdown in growth because of the new factor that's emerging, namely consumers are beginning to take a hit now because student loan payments are restarting and people are beginning to take a hit on their credit scores if they don't pay their student loans. So the New York Fed is estimating that's as much as 6, 7, 8 million households that now are at risk of no longer being able to get credit. So that's a headwind to growth while we at the same time have some upward push on inflation. So that's stagflation in a nutshell as the baseline scenario that we view as the most likely case at the moment.

So one way to assess that is, once again, to go to your Bloomberg screen and look at the Redbook same-store retail sales. That went up a lot just immediately during the Liberation Day weeks when we had, of course, a lot of people that were front-loading their purchases. But in the last several weeks, the same-store retail sales data from Redbook has started to show

and seeping lower. We are now below 5% in nominal growth for same-store retail sales. We are watching that trend very, very carefully. And this is weekly data that comes out every Tuesday at 9 a.m. That will tell us something about, is the consumer really in such great shape as their balance sheets would be saying? Or are these headwinds

especially headwinds coming from tariffs, headwinds coming across the board, especially from the student loan problems that are beginning to emerge. And they only really started emerging here in May. And we are worried that the U.S. consumer could begin to slow down. And we're beginning to see some signs of that trend downwards in the Redbook same-store retail sales data.

What you're describing is potentially a nightmare for the Federal Reserve. You talked about the dynamics playing out in Europe. The ECB has been reducing interest rates now for a number of months. Torsten, where do you think it leaves the Federal Reserve at a time when I hear a lot of people saying they should just sit this out, sit this out for the summer and maybe sit this out for the rest of the year?

that's extremely important because this issue is of course exactly that if you have high inflation the future be hiking if you have no growth the future be cutting so which one is it does it look like apples to like oranges how much weight do they put on inflation going up how much weight do they put on growth slowing down and the dual mandate is torn into completely opposite directions that's why the easy answer to that for the FOMC members is to say we're not doing anything but exactly to your point Jonathan what if

the inflation data does start to move up much more. Or on the other hand, what if growth starts slowing down more? It's a really difficult spot for the Fed to be in because monetary policy works with a lag. FOMC members will say that's as much as 12 to 18 months. So it's almost impossible for them to catch this falling knife because we just don't know at this stage whether the growth slowdown will dominate or whether the rise in inflation will be dominating. Hey, Torsten, provocative stuff. Appreciate the catch-up. Torsten Slok there of Apollo.

If this government spending in defense goes towards things like R&D that have dual use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

Thank you.

Ready to bring your visions to life? Learn how at amazonbusiness.com. AI is redefining what's possible for your business. Are you up for the challenge? Microsoft is helping leaders like you get AI ready faster with unified data and simplified platform management, unlocking up to 150% improved output.

Just look at the NDA. They're using AI-powered insights to deliver more personalized fan experiences. Then there's BMW, driving change confidently with safe, secure AI tools and guidance. And the LEGO house? They're creating new interactive experiences for people to explore.

No matter where you are in your business journey, Microsoft is here to help you achieve real breakthroughs that drive impact. Their industry-leading trustworthy AI fuels innovation in ways that are safe and secure. Business leaders Microsoft surveyed saw an average of 3.7 times ROI per $1 invested in generative AI.

Growing and innovating your business is your job. Microsoft helps you achieve that with innovative AI tools and experiences to guide you confidently into the future. Whatever change comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers.

We can build on the conversation with the perfect guest, Bob Diamond, the founding partner of Atlas Merchant Capital and the former Barclays CEO. Bob, good morning, good to see you. Good morning, Jonathan. How are you? I'm good. It's good to see you, sir. Let's just recap things. Where are we right now? Big 30,000-foot view of the banking sector in America. How are things shaping up? You know, I think just kind of the back and forth and on the one hand and on the other hand from Herman suggest pretty much my view, which is kind of a balance.

I think we'll see a turnaround in deal making, in advisory in the second half of the year that was a bit slower than people expected in the first half.

I don't think Wall Street will repeat the kind of trading performance they had, which was kind of like Christmas in the first quarter for trading desks with all the volatility. But I think it's a good environment. So no big warning signs. I think, as you said, the report from Citi that long-loss provisions are a bit higher is not surprising. I would be very surprised if they're more than a bit higher. An okay environment.

for the big banks or for the smaller banks as well? Well, it's a great environment for the smaller banks. And as you know, we're very focused on regional and community banks.

We've done our first close in an investment strategy for that sector. We think that the 4,500 regional and community banks, one, they're incredibly important to the economy. They do over half of the lending to small businesses and family-owned businesses, but 4,500 is probably the wrong number. And many of the smaller, more private community banks that are so important to their communities,

are frankly just too small to succeed with higher technology costs, higher regulatory costs, higher compliance costs. And Jonathan, what we're seeing is with a focus of our banking expertise, our integration expertise,

The CEOs of these banks want to take part in consolidation. The opportunity to increase ROE through cost synergies, particularly on in-state transactions, is terrific.

I think in addition to that, as you look at the go-forward business opportunity, we have higher rates. They're probably trending somewhat lower but not too aggressively and very high demand for credit. So the environment could not be better for a strong regional bank today.

Bob, we often hear that tariffs and rates act as overhangs on potential M&A and consolidation. But stepping back, there's also a tremendous amount of disruption going on at an industry level. AI is disrupting many industries. You still have this transition in terms of

office and real estate post-COVID. You have the energy transition, and we'll see what happens with reshoring. So would you argue that disruption in and of itself is gonna lead to more industry consolidation and M&A across various sectors? - Yeah, I don't think that's a bad hypothesis, particularly with AI. I think looking at financial services again, which is kind of our expertise and our focus, it's nothing but positive in terms of, in the first stage, greater efficiency.

And even where there's been that disruption in the U.S., kind of the U.S. economy around uncertainty and tariffs.

We have a couple of broker dealers that were invested in overseas, Panmore Gordon in the UK and Kepler Chevro and Paris Space, but really focused on Europe for equity sales trading and research. They both had record earnings in the first quarter for flows from US investors into the UK equity market and into the European equity market. It's incredible to me every time we see these disruptions.

It's like the markets are reacting almost before we're ready to do the analysis. So those are first quarter numbers at Paramoor Gordon and Kepler Chevro and they're records for the firms in terms of flows from US investors into the UK and into Europe. So it's amazing how agile the investors are.

I was going to follow up and ask you about that because I know you have a very global experience throughout your banking career. And it's also just stunning to think about how soon the January American exceptionalism thesis turned into sell America after Liberation Day. Do you see those trends in terms of flows and sentiment moving away from U.S. markets continuing? Or is it more of a kind of a near-term blip? I think there are reasons to continue. So one of the reasons is it's been a

big big divergence almost since two thousand eight in the great financial crisis certainly in banks but really in equities in general the outperformance of u_s_ equity markets has been very very clear relative to the u_k_ in europe so you had a you had a bounce coming

And I think one of the catalysts for that is this administration's kind of gave a boot in the butt for the Europeans to say we really have to focus on spending. We really have to focus on private sector. We really have to focus on the economy growing.

And I think the attitude change across Europe and the attitude change in the UK toward private sector success, business, profitability has been positive for them. So I think the US is still like the leading economy. It's so, you know, the financial services industry is so deep, it's just such an impressive machine.

It's not a negative on the US necessarily. I think once we work through the uncertainty around tariffs, we'll see the strength. But a bounce in Europe and a bounce in the UK was coming. Do you still see the policy mix from this White House as pro-risk, pro-growth? I think to me, Jonathan, the single thing that investors are looking for right now, well, there's not one thing. But if I picked one out, it's certainty.

And I think, you know, calming down the situation with US and China would be a very big part of that. So I think the announcement today, if we move forward with solving some of those situations, I mean, keep in mind, if you go back like 10 decades,

then tariffs were like 2.5% on average. They got up to 25% or 30% with all of the noise. If they settle around 5% or 6%, I think we have confidence again and we have certainty again. I think we'll have deal-making come back. So I think this is a big moment.

And I think what's been recognized is that China actually has some pretty strong cards. Rare Earths is one of them. But, you know, as you look at the latest numbers, China still had an increase in exports.

Exports to the US were down 30%, but exports to the rest of the world were up 11%. So overall, their exports were up. Up more than 20% to Vietnam. Right. So less than 10% of their exports are to the US today. Dan, this is something you talked about. The last few months have revealed the leverage that the Chinese have this time around, maybe in a way that wasn't really enforced several years ago in the president's first term.

Yeah, absolutely. I think there might be some positives that redirect and reorder some critical security-based industries, technology, pharma, medical supplies, etc. But I think the theme that I'm just hearing from Bob is one we just talked about with Ed earlier, which is this unintended consequences. We've given a kick to Europe to start spending and maybe in many ways created better growth opportunities for them that they wouldn't have taken on earlier, much like the DeepSeek analog.

Bob, does that mean that you're more focused on the U.S. as everyone starts to look elsewhere? That maybe there's better opportunities here now? Relative to the last three or four years, I think the opportunities in the U.K. and Europe are there. But Jonathan, one of the things we felt in Atlas Merchant Capital was one of our real competitive advantages in financial services is we're focused on the U.K. and Europe in the U.S.,

Prior to COVID, we had done just as many investments in the UK and Europe as we've done in the US. Since COVID, it's been US, US, US, because that's where the opportunities are. So I would say it differently. I hope we continue to see opportunities here. And US regional and community banks writ large, that's a phenomenal opportunity in the US. But if you give us more opportunities for growth in the UK and Europe,

then Atlas Merchant Capital is going to be very, very busy. And that's the direction it looks like we're going in. Just give us the number quickly again. What are we at now? Regional banks in this country? Four, four and a half thousand? Four and a half thousand, and it's probably the wrong number. And you've got us coming down to what? I think three years from today, market down will be at one to 2,000. It's a punchy goal, that's for sure. Punchy goal. You could be a big part of it too. Bob, it's good to see you. Good to see you, John. Thanks for dropping by. I appreciate your time. Bob Diamond there of Atlas Merchant Capital.

If this government spending in defense goes towards things like R&D that have dual use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favorite podcast app. How can you grow your business from idea to industry leader? Bring your vision to life with smart business buying tools and technology from Amazon Business. From fast, free shipping to in-depth buying insights and automated purchase approvals, they deliver everything you need to achieve your goals.

It's not easy to stand out from the crowd. Simplify how you stock up to get ahead. Go to AmazonBusiness.com for support. AI is redefining what's possible for your business. Are you up for the challenge? Microsoft is helping leaders like you get AI ready faster with unified data and simplified platform management, unlocking up to 150% improved output.

Just look at the NDA. They're using AI-powered insights to deliver more personalized fan experiences. Then there's BMW, driving change confidently with safe, secure AI tools and guidance. And the LEGO house? They're creating new interactive experiences for people to explore.

No matter where you are in your business journey, Microsoft is here to help you achieve real breakthroughs that drive impact. Their industry-leading trustworthy AI fuels innovation in ways that are safe and secure. Business leaders Microsoft surveyed saw an average of 3.7 times ROI per $1 invested in generative AI.

Growing and innovating your business is your job. Microsoft helps you achieve that with innovative AI tools and experiences to guide you confidently into the future. Whatever change comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers.

So with me around the table, Greg Peters of PGM, Seth Carpenter of Morgan Stanley. Seth, just your first take off the back of that data, not in line with what you were expecting. No, that's exactly right. We were expecting roughly with consensus that it'd be up, you know, two or three tenths on core. I think one thing that's important to remember, though, is there are lots of moving parts here. We had already seen lots of swings in things like used cars before. We are coming into this year on a deflationary trend or disinflationary trend here.

And so, you know, I think we got to just take this as one month's worth of noise. The other thing, though, is it's still early game. So when we look at what happened before with tariffs, it did take two or three months before you saw any sign of the tariffs and the inflation data. And so I think this is still the beginning of the game, not the end of it. Timing and sequencing is really important. I know you've done the research because I've read it. The data this morning, you called it noise and not signal.

What was the experience of the tariffs in the first term under this president and the timing of the sequencing of things, the hit to inflation and the hit to growth? And why should we think it's going to be the same this time around? Yeah, I mean, I think that's what's really tricky is it does seem like the inflation comes from the tariffs after two or three months. The hit to growth comes after two or three quarters. And so that mismatch in timing, I think, makes it hard for markets, but very hard in particular for the Fed.

I think in 2018, one of the big changes then versus now is that it was mostly focused on China. If you look hard in the core consumer goods data, you can see the effect of inflation, but it was transitory then. We have every reason to suspect it'll be temporary this time. But the numbers are bigger now. All around the world tariffs, bigger tariffs on China, Majlo, whatever sort of deal comes out from London. And so we think there's a big difference there.

Also muddying the waters, though, we know how much front-running there was before the tariffs coming in. So is that going to change a little bit the pricing dynamic? Easily could do. Greg, would you fight any excitement this morning around this print? I would. I agree with Seth. I mean, it's way too early to make any kind of determination around this particular number.

The one question I have for Seth, though, is how do you think about two components, the housing component, which is key because that also feeds into growth, and then the service sector, which is basically a measure of wages and labor health. So a lot of investors are excited around services

dis-inflating, but that's actually kind of very much a double-edged sword. How do you kind of think about that? Completely agree. It's a double-edged sword and I think it's complicated. I think from the housing, it's a national phenomenon and it really will reflect the tightness in the labor market.

There, we've been expecting that to continue to drift down close to pre-COVID rates, you know, month on month, maybe not going below it, but getting close to where it was before. For the rest of services, though, I think we have a countervailing force that needs to be more on people's radars. When it comes to policy effects on the economy, on markets, everyone's been focused on tariffs, tariffs, tariffs, tariffs, tariffs. Don't forget, we've got immigration restriction.

Immigration restriction matters a lot. We think prior to COVID, the run rate, sort of break-even rate for non-farm payrolls was probably 110, 120K. 2024, 2023, that run rate went up to 240, 250K. It's going to drop to something closer to 75.

That's a meaningful restriction in the growth rate of the labor supply. And people here should remember what it was like coming out of COVID when it was hard to find workers. You saw hotel buildings, for example, where like the top 10 floors, for example, were just left vacant because they didn't have staff.

I think those sorts of staffing shortages are very plausible and that could be putting upward pressure over the second half of the year for the services outside of housing. Not much pressure right now. If you are just joining us, a downside surprise on Headline and Core CPI. Month over month it came in at 0.1%. The median estimate in our survey, 0.2%. On Core, taking out food, taking out energy, it came in at 0.1%. Against the median estimate at 0.3%.

Mike McKee standing by. Mike, I want to come back to you. You've been digging through the details. What's the source of this downside surprise? Where's the surprise coming from? Well, overall, John, it looks like goods prices did not rise. They were flat during the month, which is not what was expected. Services prices were down. Gasoline prices fell 2.7 percent. So that had a big weight. The thing that did prop up inflation was, as you guys have been talking about, housing. But a couple of other areas that did surprise people.

We saw a slight rise in home furnishings, about a two tenths of a percent. But apparel is down by four tenths. That was expected to rise. And here's the real surprise in these numbers. Used cars and new cars both fell in price by half a percentage point. The expectation was tariffs would drive those higher.

Airfares were down as people kind of expected, given the travel fall off that we've seen, down 2.7%. So there are some surprises, some non-surprises in here. Oh, I was going to mention, John, you were talking before the number came out about the cost of Hulu and all those other subscription services.

they were up six-tenths of a percent, one of the larger rises in the CPI this time. I think maybe what we're seeing is

companies selling out of the inventories that they pulled in, that could be one of the explanations for not seeing kind of the tariff effect that we thought of. And Mike McKee, thank you, sir. We're all feeling that price pressure on the Hulu side of things, that's for sure. I'll talk about that another time, no doubt. Seth, what did you make of that explanation? Yeah, I mean, I think what Mike said was there are a lot of different components that are going in lots of different directions. And I think that's exactly where we've been for the past call it year, where the underlying trend

before the tariffs hit was a downward trend, but boy was it not uniform, it was all over the place. I think the car prices point is a really important one. If you look at the month-on-month changes of both new autos and used autos over the past, call it 12 months,

you'll see some big swings in both directions. And so again, the noise versus signal, the noise is very high right now. - I've seen some swings right now in the equity market and in bonds too. Equity futures near session highs going into the opening bell about 50 minutes away. The equity market's positive by four tenths of 1%. Just move to the bond market though. This interesting move here, compare the two year to what the 30 year is doing this morning. People like Greg would call this a bull steepener. Rally at the front end of the curve, yields dropping by six basis points, and a 30 year basically doing nothing. What does that speak to?

This speaks to everything we were talking about, which is all the concerns manifest in the 30-year, right? So the front end is driven by Fed policy, and the back end is driven by a lot of other factors. And there is this pesky auction later this week, and so I don't really see a scope for that to rally into that auction. It normally cheapened up beforehand.

so I expected to continue to cheapen up before him. A 30-year supply coming tomorrow afternoon, 10-year maturity, issuing debt the Treasury a little bit later on this afternoon too, so yields lower at the front end of the curve, we're down six basis points on twos, that unlocks some dollar weakness, euro dollar right now, 114.75. Joining us now to extend the conversation, I'm pleased to say, is David Kelly of J.P. Morgan Asset Management. David, I just want your initial reaction to the data we got about 10 minutes ago, was that a surprise to you, sir?

Not too much of a surprise. As we were going into this print, we were looking at a lot of the different industries, and there's a sogginess in the economy which is really preventing prices from going up. I mean, one of the things that I was struck by was that both airline fares and hotel lodging were down. And that really jives with the fact that people flying and people staying at hotels in terms of occupancy rates

have both been very solidly down for weeks, if not months here. And then at the retail level, I think it's just like businesses and consumers are eyeing each other nervously. Consumers feel badly about the economy, not sure. And retailers just don't have the nerve to raise their prices, although they absolutely have to. But I think the tariffs will mean they absolutely have to in the next few months, because a lot of these retailers work off tight margins.

I think we are going to have a further delay to the delayed reaction to these tariffs. But if the current level of tariffs stick, we do still expect this inflation pressure to rise over the months ahead. And I think by the end of the year, we're talking about a CPI about 3.5% year over year, consumption deflation north of 3% year over year.

even though it's taking some time for this to materialize. David, here's a counterpoint. It comes from Neil Dutter of Renmac this morning, who said if tariffs rates are up and core good prices aren't up by as much as the consensus thought, it implies more margin squeeze of retailers and less price pass-through. Why isn't that just going to be the sustainable story for the next several months? Why does it have to get worse?

Because the retailers won't be able to do it. I mean, these margins are tight. And what they're doing is, you know, for their existing margin, existing inventory, they've paid a certain price for it. And they're willing to, you know, even though inventories are going down, they're willing to, you know, accept current margins. But as they have to pay for the new inventory and mark up on that new inventory, I expect that we will see those higher prices. So it's because margins are tight in the retail businesses. And I think it's just it's going to be very, very hard for for

retailers and auto dealers and so forth to actually maintain low prices if the prices of the stuff they're buying goes up. David, if they're not in a position to eat it, are consumers in a position to pay the higher prices? Do you see a labour market that's tight enough to demand higher wages to fund that move?

Well, we are seeing a slight tightening in the labor market because, you know, as your previous guests were talking about, I think this immigration squeeze is beginning to hit. I think it's very, very much below the radar because a lot of these people don't really admit to being working at all. But there's a shortage of labor, which is getting worse. And I do think that's going to put a floor under wages.

Now, for consumers overall, this is a tax on lower and middle-income consumers. I mean, that's what tariffs are. They're a tax on imports of goods, and that hits low and middle-income consumers. So it depends on the tax bill a bit. But assuming the effects of the tax bill don't kick in until later, then I think the squeeze is going to get worse over the course of the year. And you're going to see weak consumer demand,

And so you can have a combination of an economy which seems to be pretty sluggish, say in the third quarter, but also prices which are registering pretty high year-over-year increases. David, I've got to ask you, where on earth does that leave Chairman Powell and this Federal Reserve?

I think they have to wait and see what happens with this tax bill. You've got tariff inflation that's going to be followed by stimulus inflation, unless they water down this tax bill. And I think he's right to wait and see. I mean, I also think that given how high the stock market is, you know, he doesn't want to be responsible for causing a further party in the equity market and pushing asset prices

even higher. So I think the Fed is going to wait and wait and wait until they know what the tariff story is and what the tax story is. At that point, they can assess the economy. But until that point, they've really got no reason to ease. David Kelly of JPMorgan Asset Management. David, thank you. Seth, you were following that conversation. Do you share that opinion the Fed's going to sit this out? I do think so. I think right now there's no urgency for them to move. I mean, you saw the year-on-year number. Even with this downside surprise, the year-on-year number was 2.8%.

I haven't seen what my team has sort of done for the translation to core PCE, but you're still probably talking about something like two and a half percent. And so even though that's well below the peaks we saw coming out of COVID, two and a half percent, still a half a percentage point higher inflation than the Fed's target. And to date, we haven't seen any deterioration in the labor market. So I think it's a very difficult proposition to argue the Fed needs to cut in June. Why not take the optionality, sit and wait? They can communicate their

inclination to have the next move be a cut through their dot plot of the upcoming meeting, that seems fine. But I don't think there's any urgency on their part to move. If you've got a clean read on their reaction function, they might not move, but you have a decent understanding of how they would move based on incoming information. So I think so. I think the simplest version of this, and this isn't going to be groundbreaking, is they've got two mandates. They have to worry about growth and employment on the one hand, they have to worry about inflation on the other.

at any point in time based on the current set of the data and then your best guess as to where things are going, which one's the bigger problem and react to that one. And so right now the bigger problem is very clearly inflation. It's come down but it's still above target. The labor market today is fine. Where are things going? Well, we start to make forecasts

We think inflation is going to go up from here. They probably think inflation is going to go up from here, but we don't know that yet. But until you get that confirmation, there's no reason for them to move. If we're right and inflation does go up, like I think is the consensus, before the labor market starts to slow, before spending in the economy starts to slow, well, that just reinforces the idea that inflation is the bigger problem of their two mandates. And so we've been saying for a while, don't count on a rate cut at all this year.

because if inflation keeps drifting up before the economy cracks, it makes it easier for them to just sit on their hands at the current level of policy rates. Greg Peters, sitting on your hands through the summer is one thing, through the year is another. Are you expecting them to sit on their hands through 2025?

You know, it's data-driven, of course. That's my out. But we've been kind of penciling into cuts just to get to kind of the top end of neutral. But it's a complicating factor. I think it's how you...

position the inflation. Clearly, they're going to be hesitant to use the word transitory, but there is this belief that it's a one-time shock and you have to look through it. But my read is that they will prioritize growth.

If you just kind of think about it in a matrix, if growth moves down hard, I think we're pretty sure inflation's falling. So I think they're worrying about and prioritizing growth over inflation, but they can't tell you that because they need to be credible on the inflation front. So you have to kind of look through and kind of read in between, which is difficult to do. Is that another way of saying Governor Waller has a luxury that Chairman Powell doesn't have?

Yes. But I think it's right. And there's some politics there too, right? But our belief is inflation rolls over. I'm sorry, growth rolls over. I think they'll respond to that, even though inflation remains well above target. Greg, this was smart. It's good to see you, as always. Greg Peters, the FPG, alongside Seth Carpenter and Morgan Stanley. Seth, thank you, sir.

And as always, on the Bloomberg Terminal and the Bloomberg Business App.

Learn how at AmazonBusiness.com.

Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data and with it, unlimited possibilities. Start saving today with Verizon Business. Ranked number one in small business internet customer satisfaction by J.D. Power.

Starting price for 25 megabits per second LTE internet plan with smartphone plan savings, plus taxes, fees, and economic adjustment charge. Terms apply. For J.D. Power 2024 award information, visit jdpower.com slash awards. What does being financially invested sound like? A retiree on a cross-country drive? Someone with new long-term goals? A student getting their start?

This is an iHeart Podcast.