Uh but there is an interesting question To be sort of asked around all of this Which is basically alex if we've got to The point where we're pricing in Four hikes i.e hot inflation fully Priced what comes next Does the does the fed get more hawkish If we have fully priced in those kinds Of uh those kinds of moves what does That mean for the growth value rotation Does it start to pause uh as many as are Starting to suggest uh certainly that's The view coming out of barclays so let's Talk about whether or not hot inflation Is fully priced mike mckee bloomberg International economics and policy Correspondent joining us uh and ira Jersey chief u.s rate strategist for Bloomberg intelligence ira let me start With you is hot inflation Now priced So yeah i think it mostly is if you look At what the uh what the inflation swaps Market is pricing so this is where uh The market thinks that cpi will be over The core over the tenor of this Particular instrument um if you if you Look at that we're thinking four-ish Percent inflation this year and then Slowing inflation in 23 and 24. so so The market i think is is certainly Pricing for a deceleration of inflation Growth but four percent inflation is Still relatively high to what we've
Gotten used to over the past two decades So um so i do think that at least in the Rate side of things the rates market is Kind of there already uh thinking that We're going to have continued inflation Uh you know well above three percent Which of course is well above the uh the Fed's target all right mike next Question to you same thing um is hot Inflation fully priced Well i defer to ira on the fully priced Idea but i would say that the fed Probably thinks it is at this point Because we've not had any secret about The fact that the fed is going to be Raising rates they've talked more and More about it as the weeks go on it's More a question of What is the price what is the Appropriate price for uh each of the Different tenors and that's what the Market is trying to figure out jay Powell noted that yesterday talking About how uh the markets tend to you Know overreact and be somewhat uh Volatile as they try to piece together Where they should be on these things Because they haven't had it's been two Years two and a half years uh since this Round began two two years and then we Went for seven or eight years before That at zero rates so what is the actual Price what is a a five-year note Actually worth
Mike let's just talk about what the Fed's job is going to be going forward We heard it articulated yesterday by the Fed chair jay powell up for renomination He talked about the idea of being able To bring inflation down without sort of Damaging the u.s economy that is a very Tough needle to thread In terms of the pricing on inflation There is this kind of expectation as ira Talked about of inflation coming down my Question is can it be brought down Without damaging the economy and if that Is something that we now need to think About is that the focus for markets Going forward from here rather than Worrying about kind of where inflation Is and the fed reaction it's what action We get from the fed's um Feds moves in terms of the real economy Well i think you'll see the fed move Very cautiously their track record in This area not very good over the history Of u.s recessions a lot of them have Come about because the fed over Tightened But it reminds me of the old saying it's Better to be lucky than good The fed could do it this time without Doing a whole lot if the reasons they Think we are seeing this inflation are Correct and they start to go away if Supply chains start to rationalize at The same time that consumers start to
Spend a little bit less particularly on Goods rather than services because the Government support they were getting has Slowed down Then inflation could come back down And could come back down noticeably not Necessarily to their two percent target Without them having to tighten too far That's going to be the question is uh is The fed going to have to do this or is It going to be things that happen sort Of organically right and in some ways Rents for example immune in some ways to Both of those things um uh we'll break It down a sec um ira If what if the scenario that we're sort Of talking around here works out that as Inflation will peak and then slowly move Lower and that the fed's not going to Make an enormous policy mistake where do You think we need to see the biggest Re-rating in assets Yeah well i i think for the for the Rates market i think that probably means We get a little bit of a steepening of The yield curve if the fed does it Correctly right so so the risk here is That the federal reserve hikes too much Right and too fast that goes to guy's Question from before Is if if the fed gets it wrong like Might notice they often do and go too Fast too quickly that's when you can get A significant flattening of the yield
Curve that's probably when you see risk Assets do pretty poorly and then you Know kind of forcing the fed maybe to Slow down their their interest rate Hikes um so so i think there is a tough Balancing act here um and as far as you Know market repricing like there's not a Lot of markets right now that we see That are very out of whack in the fixed Income uh space except maybe the tips Market a little bit there's been a lot Of people putting in tens of billions of Dollars into tips products like etfs and Mutual funds In a market that's relatively illiquid Compared to say the regular u.s treasury Market so you see real yields at Negative 80 basis points for 10-year Tips that's way too low and and over Time i think that's where you can see a Significant repricing as the fed hikes And starts to run off their balance Sheet which seems like it's it's all Done deal that the fed is going to start Doing that very soon after they Initially hike Ira how quickly Well we we think that that the fed's Gonna is gonna hike in march and it's it Probably may or july will be The months when the fed will start their Runoff um we think mid-year uh for for Runoff would be the the right time Because they can basically prep the
Market with uh two meetings and and let Us know how they're going to actually Conduct their runoff um in in a in a Significant way plus get some feedback From uh from investors and uh and Brokered dealers so so i think july is When they start we think that they'll Start at a pace of around 90 billion Dollars of runoff a month uh which um Uh which would be a little bit slower Than they were buying but that's still a Reasonably fast pace so there will be uh You know market repricing on on that uh Information so things like that the Mortgage-backed securities market could See their spreads widen uh which Obviously will slow down the economy a Little bit if you have slightly higher Mortgage mortgage uh interest rates that Would uh certainly have a an effect on Housing well considering we can't even Really build all the houses that we're Trying to build that's definitely one Thing um hey mike powell made the point Yesterday that all of this is just to Get to neutral it doesn't even count yet As tightening what's the sequencing for Actually tightening Well that's a good question because they Don't exactly know where neutral is They're betting it's about two and a Half percent and there's a great debate In the markets about whether uh you can Get to two and a half percent they
Didn't when they were coming out of the Great financial crisis and there are Some on the other side of that trade Like larry somerses they're going to Have to go well even bill dudley Yesterday saying they're going to have To go three four five percent uh before They get to neutral we don't know what Uh the demand side of this is going to Turn out to be and that's the problem For the fed so i think they're going to Be very cautious uh bill dudley makes a Good point in a bloomberg opinion Article this morning that may uh sort of Push back at what you were saying ira About when they start the balance sheet Runoff he thinks that they want to get The fed funds rate up to at least above One percent so that if things go Pear-shaped they can start cutting it Again And not have to immediately start qe Again so it could be a little bit longer Faster than the two years before they Started tapering or Letting the runoff go last time but a Little bit fast a little bit slower than Some people are anticipating then when They get above one percent alex is the Answer to your question they start to Look around they Start to see what is happening with the Economy and what is happening with Inflation
