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after a November to remember for stocks and just about every investment asset really December has gotten off to a bit of a rough start for long Traders dialing back some of their bets that the Federal Reserve will cut rates as aggressively as they might have thought just a a few weeks ago really seen some weakness in the latest economic data but fed chairman Jerome Powell is keeping up his message that the Central Bank needs to move carefully on policy into next year so let's talk more about this economy and thec polic path from here on out we are very pleased to be joined this morning by Muhammad larian the chief economic adviser at alance the president of Queens College Cambridge and of course columnist for Bloomberg opinion Muhammad thank you so much for taking the time this morning I want to start by asking what you made of the exuberance we saw over rate Cuts last month was it overdone good morning Nathan thanks for having me yes I believe it was overdone I do believe that the FED is is done raising rates but I don't think they will validate what's currently priced in by the markets in terms of rate Cuts next year now we have this debate going about how long the FED will keep rates elevated whether it's higher for longer high for longer I mean the market is pricing in 125 basis points of rate Cuts next year does the FED have room for that kind of easing not yet um does it few things that we have to keep in mind one is the inflation Dynamic while we've had Goods deflation Services remain rather hot in terms of their inflation rate they're not disinf lating fast enough and at some point the goods deflation will stop so getting to 2% inflation is the inflation Target is far from automatic second and we'll get more evidence this week the labor market is still doing doing really well and I suspect that the FED would like to see some weakening in the labor market um thirdly the markets has have already loosened Financial conditions significantly you know Nathan November according to the Gman Sachs index of financial conditions was the biggest loosening of conditions in any month since record so there's been a tremendous loosening of financial conditions I think if you look at those three things they suggest the FED will be more careful in cutting rates than what the markets expect right now well let's take those three things in turn then starting with the stickiness of services inflation why do you see it sticking around as much as it has can policy make an impact on the elevated Services price pressures that we're seeing in this economy Nathan that's a key question and a very good one the problem with falling behind on inflation which is what has what happened into the FED is that you allow the inflation process to go from a few items in this case it was energy and food to the goods sector as a whole and then next thing you know it starts getting embedded in the service sector now why is that a problem because the service sector is less sensitive to interest rate hikes so the minute it gets embedded in the service sector it's harder for the central bank to get to that inflation and that's why the stickiness of the service component of inflation is something to keep on the radar screen hopefully it's not going to last for a very long time but don't forget the outright deflation in Goods is going to stop so we do need the service sector to disinflate further and that gets to the question about whether cracks in the labor market are what it's going to take to get inflation down to the Target that the FED has set out 2% because Services is so tied to the labor market what is your expectation about the data that we're going to see on the jobs Market this week uh particularly uh the jolts data today and the all important Friday jobs report so it's interesting that for the Joel sta today blo economics expects only a marginal decline um and blo economics expects that the ratio of the unemployed to drob vacancies will stay above the historical averages so to put it into context Bloom economic expects that ratio to go from 1.5 to 1.44 and that's still above the average you Nathan your question really comes down to something that the FED doesn't want to talk about but increasingly others are talking about which is is 2% the right inflation Target if our labor market is slightly less flexible than what it used to be before if the supply side as a whole is less flexible around the world which it is should we continue to insist on a 2% inflation Target or should the FED be willing to tolerate somewhere above that why would the FED want to tolerate somewhere above that not because it wants to create inflation expectations that won't happen but instead because it doesn't want to unduly sacrifice the job market unduly sacrifice growth and undu sacrifice aspects that are key to the equality of income and wealth so that's going to ultimately be the big question is does the FED insist on staying at 2% and therefore with really weakening the labor market or is it willing to tolerate slightly higher inflation because that's the reality of of today's Supply constraint global economy we're speaking with Mohammad alaran Bloomberg opinion columnist and the chief economic adviser at Alliance that is a big question Muhammad because this fed has really hammered home the target of 2% they've really been laser focused on that do you see room from some of the commentary that we're hearing from this Federal Reserve that it could be open to a higher inflation Target and what would that mean for the US economy so I don't think we'll ever hear this fed say we are revising our inflation Target from 2 to say 3% that's not going to happen they're not going to explicitly revise up the inflation Target because they've missed it for so long and by so much that they will feel that that will undermine their credibility what they may do is continue to promise US 2% in the future but but tolerate higher IE don't get to 2% very quickly now what does that mean for the economy I think ultimately the choice facing the FED is the following Nathan either they stick to 2% and risk tipping the economy into recession or they tolerate slightly higher inflation they don't push the economy into recession and they find out that that is stable that it doesn't unanchor inflationary expectations My Hope Is that they will opt for the second option but we we'll have to wait and see well what could that mean though for Market volatility I mean we've seen a lot of questioning in this market about whether the FED is serious about the message that it's putting out there if we do see the sort of rhetorical focus on a 2% Target but maybe not a realistic 2% Target what could that mean for Market volatility so first the sorts of volatility we've seen in the fixed income Market was Unthinkable not so so long ago um every day seven to 10 basis points moves often on very little um so that's something else going on in the fix income Market what is more worrisome is the issue you've raised which is that the FED says things and the market totally ignore it last Friday was a perfect example of that CH pal was very clear he said it would be premature to talk about any interest rate cuts and he left the door open for interest rate hikes and yet a market that had already rallied by 40 basis points in the front end on the second year the second year the two-year yield had come down by 40 basis points rallied another 10 basis points um and that you know started a whole conversation yesterday about whether TR pile was steamrolled by the market where the FED pile was stiff armed by the market um the fact is that fed communication is not as impactful as it used to be which gets to a question I've been wanting to ask you uh all morning long I mean you've been very critical of fed messaging fed policy in the past you've said that the FED waited too long to tackle inflation how would you grade the fed's performance now so I think they've played Major catchup which they needed to do um so if you look at analysis and action where they had failed earlier they have corrected that um they've also paid much more attention to the supervisory role so that is good Communications remains poor and again we had examples of that over the last few weeks so they still have a significant communication problem and they still have a credibility problem you know the whole point of forward guidance um is for the markets to listen to you and for the markets to do the heavy lifting for you what we're seeing now is forward guidance as we saw last Friday is is being completely ignored by the market and it is really interesting to me Nathan that the market is taking on the FED on a variable that the FED controls completely I mean think about that the fed the Market's basically telling the FED I don't care what you think about an interest rate that you set I think you're going to do something completely different and that's quite a statement from the market to the Fed so in our last minute Muhammad what would it take for the market and for you to get that credibility back from the Federal Reserve what does the FED need to do to regain its credibility in your view so first let me just say that in in in in terms of the outlook for 2024 I think the market should be listening more to the fed that's why I don't think the FED is going to end up validating what the market is pricing in for cuts in terms of what it takes takes a couple of things one is something that the recent G30 report on central banks stresses is for central banks to be more humble to recognize that we live in a different world and have got to have a much broader mindset and much greater cognitive diversity um and the second thing will take is better accountability um the FED is not as accountable as it should be and therefore even when it makes Mist repeated mistakes and they've made five different mistakes in the last few years even when it makes repeated mistakes it doesn't own those mistakes and therefore it raises doubt among lots of people as to whether it's learning from those mistakes so the two things it really would take is being more open-minded having greater cognitive diversity and secondly better accountability thank you Muhammad really good to get your thoughts this morning Muhammad L Arian Bloomberg opinion columnist and chief economic adviser at aliance
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