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our next guest says that the Boe faces one of the trickiest sets of policy challenges they have and separately he criticized Powell's hawkish Paw's decision last week want to bring in Muhammad Al Aryan he is the chief economic advisor at Allianz and the specifically your problem with uh Pal's test or well not his testimony last week his uh his what he had to say to the markets last week um what did you not like so I called it confused and confusing confused because they said three things that are internally inconsistent on the one hand they increased the inflation forecast they also increased the amount of hikes that they're anticipating but on the other hand they did not hike so that was an inconsistent set of outcomes confusing just look at the reactions in the marketplace you have those who believe that this was a committee outcome so it is what a committee would come out when the chair is trying to please everybody and you end up in the model middle there are those who think that they are signaling a higher inflation Target um and that those who think that they are making a mistake um and you saw the Divergence in the performance of the equity market and the bond market because of that so it is confusing and confused and we're going to have to wait and see what happens next is that maybe just a reflection that we're waiting to see on the data if you look at some of the forward-looking stuff it looks different than some of the backward looking stuff and we're a little confused ourselves about where things stand well that's that's the critical issue is that if you are totally data dependent which they are then you end up with serely inconsistent outcomes because the data tends to be fluid data never gives you month to month a very clear Direction on a consistent basis so if you overly data dependent and you've heard me say over and over again it is not clear what is the Strategic anchoring of this fed it is likely how it sees the economy we know its framework is outdated but they haven't replaced it so you know that that's how you end up um the key issue the market the equity Market does not believe they're going to deliver to hikes the equity Market has interpreted last week as a pause not a skip a pause because when push comes to shove they believe that this fed will be less hawkish than the bond market believes and that's the big difference right now in the marketplace Muhammad Goldman Sachs out a note over the weekend that suggested inflation in the United States is going to be much more stubborn than the markets are pricing in at this point and as a result they think the markets are too optimistic you agree with that I think that people underestimate what happens to an inflation Dynamic when it ends up in the service sector so remember to transition you've heard me say this Becky it starts with a few items then it gets embedded in the good sector and then next thing you know it jumps to services and there inflation becomes less sensitive to interest rate increases and therefore more embedded the good news is we also got like you said earlier the CPI print and service inflation moderated but I think there's a general recognition that inflation will be higher or longer where there is no discussion as yet is will it be stable higher or variable higher and that's something that I suspect a lot of people including me are going to start paying attention to because that has very different implications for what happens to the real economy what happens if it's variably higher what do you mean it's it spikes comes down spikes comes down right so what you don't want is variably higher if it's higher and more stable then we we can continue the markets can do well the economy can navigate through that if it's higher and variable then that will confuse signals and cause headwinds for both the economy and markets you know my basic View and I know that there isn't much willingness to even discuss it in the Central Banking world is our two percent inflation Target is too low we're now living in a world of Supply constraints and if we were to formulate a new inflation Target it would be higher than two percent it'll be more like three percent
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