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for more on the economic Outlook we're joined by norel rabini CEO of rabini macro Associates and NYU Stern School of Business Professor ameritus norel it's really good to see you Tony chenzi was talking about sort of the FED is in risk management mode are they doing this right yeah I would say they overall are doing it right on one side they're still worried that the surge in inflation occur in the first quarter may be slightly more than temporary even if the latest number suggest the softening of the core PC but now there's also something of a Slowdown of the economy something of a softening of the labor market there is job creation by the unemployment rate has sticked up towards 4% so there is better balance and there is a slow down in the economy So based on their dual mandate they have to worry about inflation they have to worry about growth as well so I think they're right in waiting until they start cutting rates norel do you think that the risk should be more on the inflation side or the growth side in that the risk is higher inflation or lower growth which Camp would you be on well until recently I would have argued that the biggest risk was a upside on inflation side but now uh economic growth is slightly moderated consumption is slowing down there is some slackening in the labor market so I think that the FED wants to achieve a soft Landing but not a softage landing they don't want to go to 2% with a even a short and shallow recession and therefore they have to start thinking also about the Dan to economic growth are we out of the woods yet in terms of we can avoid a recession at most will get a soft Landing um yes we won caveats you know a year ago everybody worried about a real hard Landing then there was a risk of a softish landing then people said no we're going to achieve a soft Landing but recently there was both growth above uh potential and inflation above Target so the risk was that actually econom was growing too fast and will be in a long no Landing situation and no Landing will lead the FED to stay high for longer or even higher for longer um that was the risk while I would say that right now the softening of the growth and labor market side suggested maybe the risk of a no Landing is reduced and we're going towards Maybe something closer to the goal of the fact that is a soft Landing in terms of global economic risks and what might keep you up at night I know that you worry about a lot of things and a lot probably keeps you up at night but globally when you look at what's going on in the Middle East or when you look at what's going on with Russia and Ukraine uh what's happening in Europe with those elections taking place in France and the UK or China what is the single biggest concern for you as it relates to how the FED proceeds well the biggest risk would be some kind of geopolitical shock they will lead to some spike either in energy or broader commodity prices the initial brutal Russian invasion of Ukraine led to the spike not just in Energy prices but also food fertilizer Industrial Metals uh if there was a worsening of the conflict between Israel and Hamas and escalation that includes asbah and Iran of course there could be a spikee in all ises like the one we saw in the stationary episode of 73 79 and the conflict with China is more of a slow motion a build up of a cold war is getting colder risk of protectionism and of course what's going to happen on the trade side depends very much on whether Trump is going to be elected or Biden or some other Democrat as well so I would say all central banks worry about some geopolitical Shock that spikes in their energy or other commodity prices that would lead to an increase in headline inflation that could eventually lead to a second round effect of an increase in core inflation and be a stock inflationary shock that increasing inflation reduces growth in a way they'll make really hard the goal of central banks to achieve a soft Landing I'm putting aside the US election for a second because we will get to that what is the risk that we should put on the French parliamentary second round election and the result of that well uh there is certainly a risk that the party of lean reaches a absolute majority their fiscal program the program about Europe uh is really if implemented fully uh something will be dangerous not so just for France but also for Europe however I feel that even if they were to come to power they'll be moderated they'll be moderated because there are constraints coming from the European Union from the ECB there'll be in cohabitation macron and most importantly there is Market discipline if they were to follow a reckless fiscal policy there'll be a massive widening of their Sovereign spread that fall in the stock market a weakening the Europe that then will force them to adjust we know what happened in the UK where the government of Le trust did not survive more than 44 days when the Bond vigilantes came into action so I would say the biggest constraint to a radical economic and fiscal policy in France comes from uh Market discipline and that's going to lead them probably to moderate if they come to power if they want to same power the alternative a h Parliament is not much better because that H Parliament implies a minority government on going to be subject to a vote of no confidence eventually caretaker government and to a policy and political chaos as well so either way there are risk in France but I think that market discipline is going to constrain what going to be in power from doing things that are too extreme um the rise of Le Pen indicates the rise of populist parties are there instances where populist parties are good for markets and for the economy it depends some of these populist parties start from a how to say very populist economic agenda and then they moderate in the case of Italy money when she came to power the words there be a loose fiscal policy there'll be a reversal of structural reform that did not occur and some do hope that lean can be the way I put it be melanized that once power is going to moderate there are differences between Italy and France the program ofan is much more to the right of the one of Melone Italy had a carrot of 200 billion euros of lowcost loans or grants from the EU and dragi played the role of a how to say paternal guidance in the case of meloney there is not say same figure in the case of France so they're not I don't think that France will get under lean fully melanized but they're going to moderate compared to what they are right now if they to come to power norel when it comes to a lot of the policies particularly towards China Biden and Trump actually see eye to ey more than they are facing off against one another but what you are pointing to is really the threat of increased sanctions and more protectionist policy isn't it yes it is of course Democrats and Republic and want to be tough on China but bid the administration had the view of creating what they call a narrow yard with high fences and concentrating on some critical technological factors and sanctions while the plan of trump at least at face value is one of imposing a 10% tariff on all the Imports coming to the United States even from friends and allies like Europe Japan South Korea new name it and up to 60% on Chinese Goods so I would say that the big question mark is going to be where is going toe and do that or whether it's going to offer some carrots and sticks telling for example Europeans that if they spend more on defense or if they change some of their trade policies they may be subject to exemption from the 10% tariff same thing for China it may gradually increase the tariffs every month to reach eventually 60% but if China does certain things maybe it stops short of that but the point is that any tariff is a regressive form of Taxation it increases import prices and it causes a higher inflation uh what it could alternatively do and people have discussed it is the idea of instead of a generalized tariff to forc other country to accept depreciation of the dollar and appreciation of other currency something equivalent to the what happened with the plaza or the Lou agreements people talk about a maralago agreement on currencies um but that will be similar in terms of impact on inflation to a generalized tariff as well so norel if we leave the dollar up for a second what what is the asset class that you think is going to have the most exposure to the volatility of the election based on the policies that we do know bond market Equity Market uh I would say that uh uh protectionis is going to lead to a gradual increase in inflation and that will be something will be of concern certainly to the bond market but an escalation of trade friction or a generalized trade war with the rest of the world because our trading partner might also impose tars against the United States is also a threat to the stock market a global trade War not going to be good for the stock market all right uh norel thank you so much we truly appreciate your patience and your time today norel rubini rubini macro associate CEO and NYU Stern School of Business Professor uh meridi
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