From new york city for our audience Worldwide bloomberg real yield starts Right now Coming up fed officials teaming up a Faster taper european lockdown shaking Up the ecb heading into a big month of Central bank calls we begin with the big Issue one obsession zero consensus Inflation inflation inflation getting to The inflation conversation we're Starting to split hairs over exactly What transitory means we talk a lot Using words like transitory transitory Not transitory persistent it's been long Enough cam transitory is getting smaller This world transitory has been dissected For too much what's the fed going to do About it the problem that we have with Inflation now needs to be dealt with Succinctly we've seen higher than Expected higher than consensus inflation We could see a situation Where inflation continues to be Entrenched Joining us now to discuss is columbia Threat needles gene tenutso tds priya Misra and zach griffiths of wells fargo Priya we got to start with you the range On the federal reserve right now we've Got goldman going in july we've got you All the way out in december 2023 That's in the tdr look priya how Comfortable are you with that outlook Right now
Well it is in line with our economic Forecast where we have growth flowing Because of the fiscal drag next year and We have inflation also peaking early Next year and then decelerating i mean Our view is that we're far from maximum Employment so the fed is going to let The economy run hot try and bring people Back into the labor market and therefore You know they'll only hike late 23. i Have to say risks are to an earlier um Hike but that ultimately is going to Come down to the economic outlook i Think it's less about the fed reaction Function i think is much more about the Economic outlook and you know has the Labor market structurally changed where These people who've left never come back I think it's going to come back to that We've got to work through the taper as Well the taper story will that be Accelerated in the last hour vice chair Rich clouder had this to say may be Appropriate to discuss the taper pace in December and then these comments came Just after governor waller said this The rapid improvement in the labor Market and the deteriorating inflation Data Have pushed me towards favoring a faster Pace of tapering And more rapid removal of accommodation In 2022 Zack are we ancient towards a quicker
Taper at the federal reserve Certainly some firm words there from mr Waller but we don't expect the taper to Get accelerated in december It feels like a little bit of a hasty Move at this point and perhaps they can Discuss it and outline that discussion And we'll learn more about it in the Minutes but we'd be very surprised if They accelerate the taper at this point They probably want to see more data and It's really going to come down to What happens with the labor market over The next couple months and we still Think they probably want to see more Labor market data before making that Decision gene it's very difficult to get A read on all of this vice chair clarida Could well be leaving we expect him to Be gone next year he's talking about Debating it he's not calling for it There's a difference there isn't the Gene i'm struggling to get a read on all Of this going into december are you Uh well look i think we need to remember That this policy was put in place about Two weeks ago um so i think it's very Unlikely that we get a change to that Policy in december but they're trying to Remind us something that they always Talk about which is that policy is not On a preset course and how better to Communicate that policy is not on a Preset course than to make sure that
We're keeping the market abreast to Things that could change that dynamic And so i think we're going to hear a lot Of voices on this topic but i still Think in december it's unlikely that we Get a new pace of reduction from this Sort of 15 billion that we're starting With here in november the reason i'm Struggling to read this and jane pratt I'd love your view on this too this came From neil dutta of renaissance macro Following all these comments from vice Chair clarida from governor waller he Said the following down on twitter Hawkish comments from governor wallace And vice chair clarider underscore the Need for the biden administration to Start naming candidates to the board of Governors they can push the fed's Reaction function in a more dovish Direction if they choose to do so priya That's where this is missing right now We're going through a really key phase An inflection point for policy and i Don't understand the leadership beyond Next year beyond early next year do you And is that important Uh it is extremely important right Because it's it's the economic outlook And it's the fed reaction function and If you don't know the chair you don't Know the two vice chairs um you know an Additional spot on the board i think That is adding to the uncertainty and so
Markets are trying to price in both Uncertainty on the economic outlook as Well as the fed reaction function how Nervous are they about inflation and the Sap the september dot plot showed that There's a clear divide at the fed where Those that are worried about inflation Want to hike sooner versus those that Want to wait so i think if you have Three four new people or or a movement There it can absolutely move the median Dot it can move the the conversation at The fed it can affect this uh this piece Of paper i i do want to flag that this Tapering piece is already faster than The last paper i think the fed has Responded to in the inflation risk maybe It's more risk management than their Base case view they started it earlier Than what anyone thought they started Tapering earlier they were already Tapering faster and so you know i think They've already responded is there a Need for them to respond again so back To your i guess earlier question i think The the threshold to to make the change In december is very high so they start Talking about it sure but actually Taking that step especially with with The changes of the fed uh leadership and At the board i think it's it's much too Early to be talking about that change a Bit of additional guidance coming out of The white house the press secretary
Gensake holding the daily news Conference saying we will have more to Report on the fed early next week we Wait and we wait and that date seems to Keep changing around gene you and i have Caught up recently and we talked about This odd disconnect in this bond market I hear a lot of people saying that maybe We have to go quicker on rates but still They look at a very very shallow rate Path what's the disconnect that you've Identified gene do you think we need to Pay some attention to Yeah i think that's the critical piece John is that the market seems to be Saying look inflation's a problem the Fed needs to get started hiking and the Market's actually pricing hikes before The fed is forecasting now but the Market's also pricing in the fed Stopping their hiking cycle at about one And a half to one and three quarters Which is well short of where the fed Thinks it will go i think that's a very Narrow very unlikely scenario and i Think what's more likely is as we get Confidence in this recovery and we Transition really from a recovery to a Traditional expansion which i think We've yet to do but the market will React to that and what we'll see is the Market pricing in a higher terminal Funds rate probably something closer to Two and a half percent or maybe slightly
Higher i heard from the former new york Fed president bill dudley earlier this Week and this is what he had to say on The prospect for that rate going a whole Lot higher take a listen The market expects the peak in Short-term interest rates for the Federal funds rate to be around one and Three-quarters percent one and Three-quarters percent peak in the Federal funds rate in this business Cycle will be the lowest peak ever does That have a three handle bill just to Squeeze that question in what kind of Things are you thinking about yeah Probably probably three to four yeah That's what i would well you know Obviously it's a the crystal ball is Cloudy with as you get further out there We go fed speak three to four Zach can you weigh in on that not just The start time the end point when i Heard that earlier this week i have to Admit i stepped back a little bit almost Fell off the chair three to four zach do You think we can achieve those kind of Levels on the fed funds ray Three to four seems a little high to us John but we do think something In the two to three area probably the Low end of that range is realistic and If you think that inflation is going to Be higher in this economic expansion Than it's been in the past and you're
Going to need a higher nominal policy Rate to really achieve The same kind of real terminal rate so That's something that we've been Considering and we'd agree that the Market is pricing too low of a terminal Rate at this point and perhaps if the Fed were to continue to suggest it could Accelerate the pace of taper maybe the Market starts to Re-evaluate that and that could get a Boost but yeah we think that three to Four percent is too high one and a half To one and three quarters is too low so We think something in between there is Probably more realistic priya you've got A late start i understand that the back End of 2023 And to really ask you where this could Be going i think that's real crystal Ball type stuff if you think we started December 23 it's a long way off for when The fed funds peaks but how do you think About that at the moment the limits of How far they could push interest rates Sure so we are also in in in zak scam Sort of two to three i'm probably closer To two percent than than three percent But two two and a half uh the end of the Last cycle at two and a half i think What the market's doing is really Pricing in what what we've been debating The bimodal distribution do they start Early and because of that they have to
Slow things down you know much earlier And therefore they can't have a full Hiking cycle Versus the scenario where they start a Bit late they let the economy run hot And then they may have to go above Neutral i think the markets pricing in Both these sort of bimodal aspects of This distribution which is why we're Sort of pricing in this early start but A shallow very shallow hiking cycle i Mean i do come down it ultimately is Going to come down to real rate where is The equilibrium ours what would we call Our star real equilibrium rate and Inflation now i think some of the Structural disinflationary forces are Still very much at play whether it's Globalization or technology so to see Long-run inflation expectations above Two percent is tricky it's going to come Down to our star you know has Productivity picked up to the point Where the economy can handle three to Four percent rates that i was talking About i really struggled with that so i Think the moment they start to raise Rates and the other thing i want to Highlight there's going to be Quantitative tightening at some point The fed's going to raise rates to one One and a half and i think then they're Going to let the portfolio run off That's a lot of treasuries that the
Private market will have to take down Long end rates will rise so there are Other ways the fed's going to be Tightening as well they won't Necessarily need to take the funds rate That high quantitative tightening will Also kick in to tighten financial Conditions gene have you been surprised By how much flattening we've seen in the Yield curve considering How deeply negative we have the fed Funds rate right now in terms of real Terms deeply negative in real terms Negative six percentage points or so and Yet we haven't had that steepness come Through the curve jean i just wonder how You react to that Yeah i think there are some near-term Factors that might be driving that in Terms of demand for safe haven assets And you know what we're seeing frankly Elsewhere in the world and you know There is still sort of this this u.s Growth dynamism story but there's also The fact that it's the highest long end Yields uh in in developed markets for The most part but i think as we get sort Of beyond this year i think the fact That it raises a very good point there Was a very interesting paper that came Out of the kansas city fed recently Really justifying this idea that at some Stage in the tightening cycle the fed Ought to be you know actively letting
Its bounty run off or maybe even selling Long-run securities as a way to tighten Financial conditions rather than just Raising the fed funds rate i do think That In time Ends up in a steeper yield curve and Higher 10 and 30-year yields is that Just a final word on that if you can Yeah we'd expect the balance sheet Runoff to take place a little bit Further down the road than i think Others are considering at this point and It's going to come down to the fact that It didn't go that well last time you had The september 29 team blow up i think That's pretty fresh in people's minds Even though there's been a lot to deal With since then so we think that the Balance sheet runoff is probably a Further out prospect than something in The next couple years zach zach griffith Sticking with us alongside priya misera And gene chanutsa coming up on the Program up next the auction blog demand For junk remaining hot with borrowers of All stripes rushing to market that Conversation just around a corner from New york this is bloomberg I'm jonathan ferro this is bloomberg Real yield it's time now for the auction Blog where we kick things off over in Europe with a resurgence in virus cases Sapping the mood in primary markets
Setting the stage for the first zero Sales friday since august high grade Issuance in the us also stalling gap on This friday but not before 39 issuers Came to market racing close to 60 Billion and still no signs of slowing Demand for new junk bonds surpassing Dealer estimates after raising close to 30 billion this month a bit of news out In the last couple of minutes a High-profile case taking place here in The united states the result of that Case carl rittenhouse acquitted of all Charges in the kenosha shootings that Headline just dropping across the Bloomberg carl rittenhouse acquitted of All charges in the kenosha shootings That headline out just moments ago we'll Continue the coverage on bloomberg tv And on bloomberg radio on that through The day turning to europe where the Lockdowns are back mufgs derek halperny Saying the ecb has an excuse for being Behind the curve If there's any central bank that has Credence or credibility in terms of its Guidance of being towards the back of The queue in terms of rate hikes It's the ecb it has a good solid Fundamental reason for being Much more delayed in tightening and i Think that has further to go on top of That what's happening with covet Then i think you could get another kind
Of readjustment Let's bring back in the team gene Tennessee priya mizrah zach griffiths Priya i want your view on this how much Things have changed now for the ecb Going into next month So you know i think um the whole covet Case search is another reminder we're Not the pandemic is not exactly over Plus for the ecb they have sort of Suggested that the pep program the Emergency pep program is going to end The app program is still ongoing in fact We think in december they're going to Increase that app program so the ecb That has their new framework in place i Think they want to really separate out The end of pep from the first rate hike They don't have as much of that Inflation fear now they've got the covey Downside risk as well so we think They're they are going to suggest being Well behind the The curve in in terms of inflation in Terms of when they're going to hike at While they're ending pep so we do think They're going to end pep they've already Sort of uh telegraphed that but extend App and talk about being on hold for for Quite some time the clue in pep is the e The emergency in pandemic emergency Purchase program and gene to priya's Point it may well end but ultimately They can carry that flexibility over
Don't have the excuse to do that now June I think they do have the excuse Particularly if a large portion of the Continent is locking down again and i Think you know that's the sort of the Key factor here and frankly the ecb is Probably going to be the last in the Sequence of of developed market central Banks to really Move towards tighter policy and i think The moves on the bank of england side Are ones to watch frankly If we see them actually raising rates Before even asset purchases are complete Can i have your view on this sack Yeah certainly an interesting dynamic Going on in europe and the coven case Counts i'd say the move today has been a Reminder like priya highlighted that We're not through the pandemic and that Could remain an issue so i think that Definitely argues for the ecb to remain Patient and that's kind of been our view All along we tend to joke on will they Ever be able to raise rates and we do Think they will eventually but there are A lot of steps in between here And that point and i think it does start With the elimination of the pep program Next year but we do think asset Purchases are set to persist for some Time so these rate hikes are not going To happen for a while and i'd say the
Latest developments probably push that Out even a little bit further Prior Sticking with us still ahead the final Spread the week ahead featuring u.s gdp And the fomc minutes that conversation Coming up shortly you've been looking at Live pictures from a courthouse Following carl rittenhouse the result From that court case acquitted of all Charges in the kenosha shootings from New york this is bloomberg Live from new york city i'm jonathan Ferro this is bloomberg real yield it's Time now for the final spread the week Ahead coming up we remain on the lookout For president biden's fed share Announcement eurozone and uspmi is Coming up on tuesday u.s gdp and the Fomc minutes headlining a busy wednesday And finally u.s markets closing out on Thursday for the thanksgiving holiday Looking ahead to a really key month of December the middle of december a Federal reserve decision an ecb decision And a bank of england decision to priya It's all coming together this year is All going to end in about 24 hours Within 24 hours in the middle of December how key are those two days for You Important we get the uh the dot plot as Well for the fed um But but i don't think at all we we're
Gonna have that many answers i mean from The ecb i think yes they'll extend app They'll talk about hikes being later the Fed i we don't think they're going to Accelerate paper um so i don't know if We'll get that one those are very Important meetings where i think it's Very important is liquidity conditions Have already started to worsen and we're Going into year end so i think the Markets could react a lot i'm not sure We'll get that much more fundamental Data you know from from payrolls or off Or from uh from all the central bank uh Meetings zach what about you is that a Key part of the year for you the way we End set up for next year is it just too Early to really get any clarity any Vision on what 22 looks like I think it's a huge part of the year Certainly for the outlook but also in The near term another thing that might Be flying a little bit under the radar Is the debt ceiling episode comes back Secretary yellen said december 15th is The new x date so that's the same day as The fed meeting and that's an another Factor that we consider when is it Possible for the fed to accelerate the Taper if the debt ceiling is looking Rocky as it was back in october we think At this point that's probably going to Be the situation again and as priya Highlighted we've already seen liquidity
Deteriorate a bit it probably gets a Little bit worse into year end as people Take holiday and and the markets just Aren't as active so i think that creates A difficult backdrop for accelerating The taper And outside of that yeah we'll be Watching the the non-farm payrolls Number the cpi prints but i think as far As those two numbers really changing the Fed's thinking for the december 15th Meeting i think it's more going to be a Part of the bigger picture as they look Into What type of policy moves they need to Make in 2022. gene zach turned to the Situation in washington d.c the fiscal Effort the debt ceiling debate we're Going to have it all over again over the Next month or so when we move on from That into next year i hear from a lot of People in fixed income who talk about Fiscal drag who talk about supply Actually Meeting what's happening with the taper The twin taper the treasury pulls back At the same time the federal reserve Pulls back and gene for a lot of people Outside of that world that's a foreign Concept to them they see so much Happening down in washington the idea of A fiscal drag and twin tapering doesn't Really stack up is that what you expect Next year
We do expect that next year but it's Almost inevitable right because we saw Unprecedented fiscal policy in response To an unprecedented pandemic we saw Almost 25 percent of gdp spent in a very Short period of time But by definition that will not be Sustained and that will become a drag i Think that's okay though and i think you Know again this economy is still trying To find its trend we are still growing Well above trend we are still in sort of This recovery rather than the expansion I think case in point is the labor Market data the last six months we've Added almost 700 000 jobs per month the Trend in a fully uh full employment Economy is probably 150 to 200 000 so i Think a lot of this data frankly can't Be relied upon at this stage because We're still in a very volatile period Let's get to the rapid fire round guys Three quick questions three quick Answers if we can and let's start with This one chairman powell or governor Brainard for fed chair chairman powell Or governor brainerd priya Governor brainerd jane Brainard zach Powell Interesting i'm surprised too went with Governor brainerd that's interesting how Things are changing developing over the Last couple of weeks next year i know
Where priya is on this zero hikes next Year one two or more zero one two or More gene I think two is most likely next year Zach Two drum roll prime israel i know where You're going go on priya Zero zero they're looking for december 2023 and final question for all three of You if i can december 15th the federal Reserve A day later on december 22 on december 16th we'll hear from the ecb and the Bank of england too if you could pick One just pick one that you want another Result to the news conference the whole Lot ahead of time which one would it be The ecb the boe or the federal reserve Priya The boe Zack B.o.e Jane That's got to be the fed i mean these Other ones are sideshows i'm surprised That those two went with the bank of England i'm surprised by that guys good To catch up jing tinutso prime israel Zach griffiths from new york city for Our audience worldwide that's it for me This was bloomberg real yield for our Audience worldwide this is bloomberg You
