The Fed makes a hawkish pivot the markets take a wild ride and
wage inflation takes a bite out of corporate earnings. This is Bloomberg Wall Street week arm Romaine Bostick in for David
Westin. This week Stephanie Flanders on the Fed's efforts to fight the
worst inflation we've seen in decades. Now the market is coming round to the idea we might have five rate rises in the US this
year. There's this feeling that OK that means they won't have to do so much later on. Plus investors adjust to the new reality of
financial conditions tightening more quickly than anticipated.
You know the market can overpriced the pace of tightening here
in in 2022 and climate capitalism. Barbara Ann Bernard on investing in a low carbon future. I believe in ESG 2.0 which
means that the intersection of materiality and authenticity. Fed Chair Jerome Powell made it clear Wednesday that the central
bank is ready to raise interest rates in March to tackle the highest inflation in a generation. But it was the speculation
about how far the Fed would go with its tightening cycle that sent waves through financial markets. In light of the remarkable
progress we've seen in the labor market and inflation that is well above our 2 percent longer run goal. The economy no longer
needs sustained high levels of monetary policy support equities ping pong between gains and losses and trading volumes this week
surging to the highest in at least a year.
We've been telling clients say the last 24 hours is hey turn your brain off for the
next couple weeks here. We've done enough on the downside whether you're bullish or whether you're bearish. We've done
enough here in the near term to catalyze a bounce. A mixed bag of corporate earnings results from Microsoft IBM Apple G.E. and
Tesla didn't help matters. And even for those investors willing to look past the Fed and look past disappointing earnings the
spectre of geopolitics was right there to give them pause. Russia on the doorstep of Ukraine. I don't think you can take
anything from Russia at face value. And it was a severe week here for equity turbulence the S&P 500
saw three of the biggest intraday reversals of the day the biggest the S&P which was down almost 2 percent from Monday
through Thursday ended the week higher by eight tenths of a percent. The Nasdaq composite which had been down 3 percent
ticked up by less than one tenth of a percent to finish out the week.
The individual stock moves. They were just as dramatic.
Microsoft swung 15 percent in 15 hours at one point this week and posted its biggest weekly point swing from peak to trough on
record. Tesla finished today higher but still lost about 10 percent on the week. And Apple which had fallen for eight
straight days rallied 7 percent on Friday its best day since July 2020. Still beneath it all was the thinnest liquidity since
the pandemic started making every swing worse and sending traders to the options market for protection like never before.
The benchmark S&P 500 is still on track for its worst month since March 20 20 while the NASDAQ 100 is headed for its biggest
monthly decline since October 2000 and eight here to bring some levity and clarity to what happened this week and hopefully to
give us some insight into what may happen in the weeks beyond.
Christina Hooper chief global market strategist with Invesco and
Uri and Timmer director of Global Macro over at Fidelity. Joining us right now to kick off our roundtable and Christina.
I'll start with you. And I run to just get your initial gut reaction here to some of the moves that we saw this week.
Well my gut reaction is that we probably should've expected this. What we're doing is going through a digestion period a
terrible digestion period that's likely result in ulcers but a digestion period nonetheless.
And that's because and really it
started with the unofficial start of tightening season when we got the December FOMC minutes a couple of weeks ago that told us
the Fed had made a hawkish pivot and then everyone scrambled to figure out what that exactly meant. And imagination ran wild. It
could be eight rate hikes this this year. And then we heard from Jay Powell this week. And while he certainly tried to soothe
markets in some ways he was very clear that the Fed is comfortable doing more this time around because the economy and
labor market is in better shape. And so that has continued to cause fear and creating a rerating among stocks especially
higher valuation ones.
Well here and let's talk a little bit about what people are rerating here. I mean we've seen some
pretty wild expectations for what the Fed might do from two hikes to as many as six this year here. What are people
positioning themselves for right now. Well then there's a couple of elements to this. Your first of
all the rotation out of the high flying sort of beam stocks non profitable tech etc that already began a year ago. So we're
actually already a year into a rotation on the expectation that you are. We're going from a year last year of a trifecta of
48 percent earnings growth abundant liquidity from the Fed and from the fiscal side very low nominal rates
negative real rates. We're losing two of those three pillars if you will. And it's all up to earnings growth. And you know if
you're a stock and you don't have solid fundamentals you're not going to kind of you know this is not going to be the year for
you. And then the other element is that you know interest rates were pretty significantly repressed last year and they still are
to some degree through quantitative easing.
And that has a direct transmission mechanism into the valuation side of the
equity markets. Or if you plug that into a DCF you know it added about 5 P points to the S&P.
Well I am curious hearing about earnings estimates because we haven't at least from some of the sell side analysts that we
track here at Bloomberg. They haven't necessarily come down at least in aggregate quite yet here. And I'm wondering if we still
need to see I guess a little bit more capitulation with regards to folks expectations about aggregate earnings growth on S&P
500. Well the estimate the consensus estimate which I get from
Bloomberg every Friday is for 2022 is now about seven point nine percent. I believe that's about 100 basis points less than it
was four weeks ago. So the numbers are coming down.
But even if it goes to 7 or 6 or 5 obviously that's a far cry from the 48
percent we got last year. So earnings growth clearly is decelerating at the same time that the Fed obviously is
accelerating its normalization process. And you know whether we get four or five or six hikes in 2022 I don't think is really
the most important thing. I'm more concerned about where the cycle ends than how and when it begins. And it's interesting
that despite all the hawkish jawboning from the Fed over the past month or two that neither the Fed funds rate nor the euro
dollar curve is pricing in a terminal point of the cycle above 2 percent. So the expectations of how the cycle begins have been
ratcheted up but the expectations of how it ends have not really changed even though you know the Fed is moving the goalposts
here. Christina how do you measure the communication so far from the Fed to your aunt's point about how long this tightening
cycle might be.
Well I think what the Fed is trying to do is talk very hawkish
scare markets. That helps in doing some of the heavy lifting. And then it can certainly hopefully be a bit more dovish when it
actually happens. I also think there's an element of this. Some conventional wisdom suggests that if they do it sooner then
there's less to do in total. And that's why we haven't seen much of a change in the terminal rate because our expectations have
changed about when the Fed's going to start and how many rate hikes we're going to see this year. All right.
continue this conversation right now with Christina Hooper Invesco chief global market strategist and Uri and Tamara.
Fidelity Investments director of Global Macro. We'll be back in a moment. This is Wall Street week on Bloomberg. This is Bloomberg Wall Street week I'm Romaine Bostick. We're
back right now with Christina Hooper and Uri and Tamara and you're in. I want to get back to our conversation here about the
whiplash that we saw this week. A lot of folks in this market aren't necessarily in full agreement about where we go with
regards to earnings with the goal with regards to the Fed where we go with regards to the economy.
But underlying all that are
basically the expectations people are trying to price in for inflation and how persistent that inflation could be.
Well clearly there are signs that inflation is going to be more structural but we have to remember that that goes. That has to
offset very major headwinds or tailwinds I guess disinflationary tailwinds from demographics from technology et cetera. But you
know our estimate is that inflation will come down here just from the base effects. And also the economy seems to be starting
to slow down now that maybe you know the current 7 percent CPI print will settle down at around three and a half in the coming
year or two. And you know due to Christina's point earlier that will actually give the Fed some some cushion to maybe a year
from now after 100 or plus basis points of tightening to say OK we don't need to shock and awe the markets as much because you
know things will be moderating at that point. But clearly between the labor markets and the housing markets which are two
major inputs into core inflation you know it's possible that instead of the one and a half 2 percent that we've seen over the
past 10 15 years we'll see something closer to three three and a half percent.
And Christina to that point here when we talk
about what the Fed is trying to do with inflation obviously it's trying to tamp it down. But it's also more about just bringing
some stability here doesn't mean we're going back down to the days of sort of you know sub 2 percent anytime soon does it.
No I don't think so and I think the Fed recognizes that monetary policy can't solve for many of the sources of inflation that
we're seeing right now. So I think there's that recognition and also it's a delicate balancing act. While the Fed believes it's
achieved its full employment mandate can focus on inflation it still has in the back of its head not just financial stability
but also the importance of treading lightly so that it doesn't choke off this economic cycle. So it doesn't choke off the
economic cycle. Can they thread that needle. Are you confident that.
I'm hopeful I'm very hopeful that they can thread that needle.
I'm certainly it is going to be difficult but the best approach
is data dependent approach. And that's what the Fed has committed to. That means though that any inflation prints as
well as measures of consumer inflation expectations inflation and inflation expectations in general is going to have likely an
outsized impact on markets at least in the early stages of this tightening cycle. But. When we go and we talk about some of the
earnings that we've gotten so far this earnings season on every conference call and almost every statement there's been some
reference to inflation or supply chain issues whether these companies have been able to pass some of their higher costs on
to their consumer base.
Do you think that the companies out there in aggregate have enough pricing power have enough wiggle
room to be able to share that costs with their end consumer. Well certainly so far many of them have. But of course that
comes off a period over the past two years where consumers were really flush with cash right. From stimulus checks the Carers
Act et cetera. And so 2022 will be an important test that as that tail wind kind of turns into more of a fiscal drag whether
companies can actually still push through those costs or whether they need to absorb it. And I think when we're looking at
earnings and as they evolve in the coming months for for 2022 that that really is the main thing that I'm watching to see if
it starts eating into the profit margin because the operating margins have really gone through the roof over the past two
years. And that explains a lot of the very very strong earnings gains that we've seen. I'm curious here in this week one of my
colleagues pointed out to me some of the relative calm that we saw in credit markets against the backdrop of all the volatility
that we saw in the Treasury market and of course in equities here.
What is that telling us.
Well certainly high yield credit spreads although they've ticked up this week remain extremely well behaved. And that does
suggest that this is more of a liquidity event than a fundamental event at least so far of course in the corporate and
in the credit markets. Many issuers have turned out their debt so they don't have that that wall that they had for instance in
2008 not not to draw a parallel between now and 0 8.
But you know in 0 8 the bond market shut down. They couldn't refinance.
And that was a major systemic issue that that's not the case right now. Defaults are very low. Everyone has turned out their
debt at low interest rates. So there really is not a credit problem right now. I I'm more interested to see what will happen
to the tips market as the Fed withdraws you know quantitative easing and starts to run off its balance sheet in the coming
whatever of you know a few months or year because the Fed owns almost 30 percent of the tips market. And if it's one thing that
has been a puzzle to me is why hasn't the five year tips break even reflected you know the increase in the CPI. I mean five
years the five year five year forward tips is still at around two point two percent. So very very stable. But it's a question
as to whether the Fed owns enough of that market to control that spread.
certainly be interesting to see. Christina I am curious also about your thoughts on the credit market and more so in the
context of how healthy some of the balance sheets of these companies are right now.
Well it certainly varies by industry. But I have to say that balance sheets in general look better than they did in 2008. I
think we're in a healthier environment this time around. And you know from my perspective we have a better chance of a soft
landing with the Fed even if it gets more aggressive than we anticipated. Of course the one big question mark is starting
balance sheet reduction so early in the tightening process. And of course the potential for it to be quite significant. So we
want to watch that carefully. I know that last time around when we saw balance sheet reduction it didn't have an impact a
negative impact on stocks. But we want to watch that carefully because I think that's where we would see an epicenter in terms
There's also a lot of cash sitting on the balance sheets of some of these companies. I mean we talk a lot about
Microsoft and Apple and the cash hoard that they have. What do you think they should do with that cash. More stock buybacks
dividends. Christina. Well I think that for the most part dividends make a lot of
sense. That keeps investors interested and it provides a source of stability when there's significant volatility. So I'd love to
see more of that money go towards dividends. And of course it's also tax advantage for investors. So it's a nice little gift.
You're in your thoughts on that.
I think you know share buybacks have been an underappreciated force in this bull market at least
the one that started in 0 9. So am I. In my view this is a secular bull market. And when you add up mergers and
acquisitions and buybacks both of which are companies buying other companies shares and therefore those shares get retired
and you compare that to IPO lows and secondaries the ratio of demand for shares from corporates versus supply of shares by
corporates is about 8 to 1. So that is a very powerful supply demand dynamic. And you know last year was a record in buybacks.
I think companies or at least many of them would prefer to buy back shares and to issue dividends because there is something
more sacred and less cyclical about dividends. But I think that that will continue. And companies as you as you point out are
flush with cash.
And there's only so many things you can do with them. And you know there's been a lot of there's been a very
consistent pattern where companies even after satisfying capital expenditures when you add up dividends and buybacks it's about
10 percent of sales for the S&P. And that's been a pretty stable number for the past 10 12 years or so. And I suspect that that
will continue. All right. I'd be remiss in letting both of you go without talking about some of the geopolitical issues. I mean
obviously the Fed moved markets earnings moved markets but there was certainly a whipsaw effect that we saw earlier in the week
from concerns about what's going on between Russia Ukraine and how the U.S. could potentially be in the middle of that area.
And how much do you price in geopolitical issues like this into the market if at all.
The question I always ask myself when something like that comes into the headlines is is this systemic for the global economy
for the U.S.
Economy and therefore for the markets. And normally if something happens with Russia which is not a huge player on
the economic scene globally I would say this is not systemic. But of course this time we have massive energy shortages
certainly in Europe. And and of course Russia is a major player on the energy scene. And so that would be the transmission how
the Russia Ukraine issue could become systemic because it could feed right into an energy shortage in Europe which is already
facing a massive increase in costs for natural gas and other forms of energy. So I'm worried about it because that you know
if if oil was at 30 we would like for me this would be a non-event at least for the markets. But but that's not the case
right now. Christina does it give you any worry. Do you prepare for this at all.
Well they do because it exacerbate Covid potential to exacerbate the inflationary pressures we're already experiencing.
dissimilar to the emergence of Amoco variant which can contribute to supply chain disruptions and increased costs. This
could also do the same. And so I just worry that it could if it were to fulminate would result in a significant crisis and a big
increase in oil prices could result in perhaps pushing back a little bit. The peak when we anticipate inflation peaking this
year. But beyond that I don't think it's going to have a dramatic impact over the long term geopolitical risks. Rarely do
geopolitical risk. Certainly are.
Rarely do. And just final question to you Christina. We're going to look ahead to more
economic data next week. Of course we get the jobs report here. Are any of these data points enough to change anyone's opinion
about the pace of the economy so far this year. Well the one data point that could is contained within the jobs
report and that of course is average hourly earnings wage growth. And because that tends to be the stickier portion of
inflation that's going to be an area that the Fed is going to be keen to paying attention to because of course it could inflame
inflation further so that you know if we see that to be significantly higher we just got ECI.
And where we're seeing the
really significant growth though is on the side of services and health care. Those areas tend to be higher turnover so the less
sticky portion of the job market. But still it could very well be a concern if we see high end wage growth. All right. We're
gonna have to leave it there. Christina it's always wonderful to catch up with you. Christina Hooper there. She's the Invesco
chief global market strategist. And Marianne always appreciate your contributions to this program during the summer. Fidelity
Investments director of Global Macro. All right. Coming up next we're gonna take a look at what's coming up on global Wall
Street. That's next on Wall Street week on Bloomberg. This is Wall Street week on Romaine Bostick. It's time now to
take a look at next week on global Wall Street starting with Juliette Saly and Cigna.
Thanks remain. It'll be a quieter week in Asia as many markets close to mark the Lunar New Year but investors will be looking
for further signs of policy support with Beijing keen to show stability ahead of the start of the Winter Olympics in Beijing.
Elsewhere in Australia the RBA meets hot on the heels of last week's strong inflation print.
Economists widely expecting the
nation's central bank to scrap its bond buying program and potentially amend its forward guidance opening the door to
earlier rate hikes. India's budget also had a down while we get earnings from big name companies in the region including
Nintendo Sony Nomura and Tata Motors. Now over to Laura Price in London. Laura. Thanks Judy. And rate hikes from the Bank of
England and the ECB. Next week was a cost of living crisis here in the United Kingdom which is expected to peak in April. So all
eyes are on Threadneedle Street following the surprise hike in December.
Will they hike again next week. Meanwhile the ECB is
Christine Lagarde. It's anticipated she will shut down calls to normalize in 2022 but won't completely rule out raising rates by
2023. We're also monitoring the situation along the Ukrainian border. Whether there's been any progress placating hostilities.
Back to New York with you Taylor. Of course the huge news here in the US this week is all going to be about tech earnings.
have to start Tuesday with alphabet all about the top line growth. And if it can be above the high teens this year we'd
move from Alphabet on Tuesday Wednesday metro platforms. We know this company as Facebook of course will be looking to see some
engagement slow within the main core platform. So this earnings report is really going to highlight how important WhatsApp and
Instagram is and of course any other further details we can get on the metaverse. And then of course we push forward even
further to Thursday where we're going to get earnings from Amazon as well.
He may start to see some slowing in that online
retail sector. But again look for more pushes and cloud services. And of course that advertising business the big report
on Friday is all about jobs. Day consensus of course for one hundred seventy thousand jobs. Really important is we're really
trying to see how this Federal Reserve begins lift off perhaps in March. Romain back to you.
Thanks to Juliette Saly. Laura right. And Taylor Riggs. Coming up on Wall Street week we're going to take a look at the
explosive growth of ESG investing is now at thirty five trillion dollar market.
That's next on Wall Street week. Welcome back to Bloomberg. Wall Street week ESG investing it's
grown from a niche theory to a market that's tens of trillions of dollars strong with investors of all stripes jumping on the
bandwagon amid pressure from clients shareholders and regulators urging them to take climate change and social justice into
account. I sat down with Barbara Ann Bernard the founder CEO and chief investment officer of Wind Kress Capital. All right thank
you so much for doing this Barbara. And I mean there's been so much talk over the last few years about the push into ESG
particularly on the east side of that equation.
I guess the big question that a lot of people really want to know is sort of
what are the components for investing in that space. So I think everyone's different version of ESG. I believe in ESG 2.0 which
to me is at the intersection of materiality and authenticity. I focus particularly on the energy transition because I think it's
the most impactful. I also really focus on holding my companies accountable. I call
it carbon accountability. So we're active in our approach and I engage with management teams and I say to them break out your
CapEx. Let me see what you are spending on decarbonisation and where.
And then I want to see your carbon footprint. And did it go down. I.e. how good are you at allocating capital when it comes
to reducing your carbon footprint. Because any CEO can tell you they're going to be carbon neutral by 2050.
The reality is
they're not going to be there. So are you on the right trajectory and are you on pace to hit your goals. Do you think
that the metrics are there right now to accurately and fairly assess how these companies are making progress toward that goal.
No. Which is why I came up with my own proprietary method called carbon accountability.
Absolutely not. But that it's also an opportunity. And you know in terms of the energy transition I think the value investors
way to play this is through the green metals. I get Tesla like growth at a commodity like multiple. If I go to places like
Canada I don't have to take on the geopolitical risk of other regions.
But when you go to a country like Canada where you are
faced with uniquely or less uniquely I'm increasingly is a carbon tax.
So in Canada companies pay 40 dollars per tonne to day and that goes up by 15 dollars every year until it's one hundred and
seventy. So the first net carbon zero come for a nickel mine for an in
Canada nickel which are both in our fund will never pay that carbon tax.
And to me that makes that company so much more
valuable because the discounted cash flows are higher. And so this is what I mean about companies that are using their CapEx
to innovate and decarbonise is having a real edge. And so this is where I treat carbon as an asset not a liability. Well
explain that a little bit more here because I think for a lot of folks who aren't as knowledgeable about this as you are they
hear carbon as an asset and they sort of scratch their head. What does that mean. Yes.
So effectively carbon is very valuable because. Sixty one percent of the world's countries and 20 percent of the largest
listed companies in the world representing 14 trillion in sales have made commitments to decarbonise.
There are some industries that can't get there right. This is unobtainable without carbon credits.
So you have an asymmetric demand supply for carbon credits.
So carbon credits are increasingly going up in price. And to me
this is climate capitalism. This is where carbon becomes a currency and an asset not a liability for the best players.
There are a lot of people that look at let's just take your turn of phrase climate capitalism. There are investors who would say
all I care about is just maximum mike. Maximizing my profits doesn't really matter how these companies make money as long as
they're doing it legal that's all they want. What's the shift in investor sentiment right now amongst the universe a universe of
people that you interact with with regard to their attention to climate change and their attention more importantly to how
companies can profit and prosper in a world where we are moving I guess towards lower carbon emissions.
Really interesting question because there are countries that mandate you reduce your carbon footprint but there are also
companies that are doing it voluntarily such as the cruise ships because it increasingly is your social licence to operate.
People care and if your customer cares it's ultimately going to impact your share price.
So this is this is definitely a shift
remain and it's for the better. It's for the better. You mentioned some of the countries out there. I mean there's a
pretty wide disparity in carbon pricing on country to country of course in terms of regulation. Country to country.
We've seen some of the Nordic nations kind of out in front on this. The EU has played a little bit of catch up but they're now
starting to push to the forefront. But when you look at some of the more traditional developed nations in the Western Hemisphere
and they seem to be kind of behind the curve yes a different countries have different pricing. So for example in the EU it's
over a hundred dollars a tonne right now in California the price goes up by 5 percent plus inflation every year. So different
governments can mandate different pricing schemes. But there's also the voluntary market and that is where you list a carbon
credit. And companies buy them on a voluntary basis.
So a Royal Caribbean cruise ship. Right. They're not regulated under any
government system but they. Offset their carbon footprint. So that establishes there's a lot of demand for carbon credits. The
other thing remains that I think is misunderstood is the supply. Why is there this demand supply imbalance. How do you create a
carbon credit. There are basically two ways you can either do reforestation where for example you take a mangrove and you
restore X or hurricane hit it. And just to put some numbers on this. So I think that's always helpful. In the Bahamas where I'm
from we have seven thousand eleven hectares of historical mangroves. If we were to restore them that would be worth three
hundred and eight million dollars in terms of carbon credits.
That's it. That's reforestation. The other way is a forest
station where you take the carbon sequestration properties of what's with mangroves and seagrass example and you get
accredited by some like gold standard and you registered it with the UNFCCC and then you consult us. And in the Bahamas for
example if you were to do that we have ninety seven thousand acres of mangroves and five point four million hectares of
seagrass. That would be worth three hundred and seventy five million dollars a year every year. That's impressive. If a
company goes down that road though. How do you verify it. How do investors know what those companies say they're doing is
actually being done.
So you typically have someone who looks at the project assesses it and that's what independently audits it.
So you can have a company like Synergy who designs the project. And then gold standard is the gold standard in the industry that
comes in and audits it. And so is there a precedent for this from me. Right. We're talking about
the carbon sequestration property of natural resources. And the answer is yes. There's one country in the world that has done it
and it's Gabon. And the buyer of that carbon sequestration carbon credit was Norway. And they raised one hundred and fifty
million dollars. So this is again where I'm talking about climate capitalism where you're at where your carbon can be an
asset and it can also be a currency.
And I'd like to get into that. So because you get paid as a country on your net carbon
footprint. So you want to get your net score down. How do you do that in a country like the Bahamas where 100 percent of the
energy is generated by fossil fuels. The obvious answer would be to install solar. The obvious problem is how do you pay for it.
This is not a rich country. And here is where I think the innovation is is is is going to be amazing in terms of. I'll
give you an example. Rock Man was trying to offset their carbon footprint. They committed to buy every megawatt of power a wind
farm in Kansas generated.
Well let's follow that yellow brick road. What is a cruise ship doing with a wind farm in landlocked
Kansas. It turns out it was not the craziest idea. They so they they basically did it gave power purchasing agreement for two
hundred megawatt farm which in return generates five hundred and twelve thousand carbon credits for Royal Caribbean for the next
twelve years annually. And if they were to buy that in the open market at twenty five dollars a tonne that would cost them
twelve point eight million dollars. So Southwestern which is the energy company got their wind financed. And Royal Caribbean got
the carbon credits. And so that is a model that is typical in company financing that can be applied to countries to finance
their energy transition and for island nations and everyone. The energy transition represents energy independence. And the reason
that is so important remain is a country like this spends a billion dollars in fossil fuels every year has 10 billion in
debt an 86 percent debt to GDP ratio and a B plus credit rating.
If we could be energy independent it would be a role model for
every other island nation. We could solve our balance of payments problem pay down our debt meet our our carbon reduction
goals with the U.N. and the rest of the CARICOM and start a sovereign wealth fund. This is game changing. It is. It's very
very exciting. And I think it's hope for a brand new green day for four island nations. Well I think that's a wonderful place
to end. This was a wonderful conversation. Barbara and Benard of when Chris Capital.
Coming up Bloomberg senior executive editor for economics Stephanie Flanders. She'll be here on the Fed's hawkish pivot.
That's next on Wall Street. Week on Bloomberg. Welcome back to Wall Street Week. The dominant theme this week
of course centered around Jay Powell and what the Federal Reserve will do to tamp down inflation. We got some clarity on
Wednesday about what the Fed will do but investors of course they're obsessing now over how exactly it's going to get done.
Joining us right now is Stephanie Flanders senior executive editor for Bloomberg Economic Stephanie.
A lot of people want to
know not just when the Fed will start to tighten policy but how aggressive it will be in doing so and how prolonged this rate
tightening cycle could potentially be. Yeah and I think that the fact that we're not really sure about
the answer to that question and certainly that investors are not really sure about the answer to that question we saw play out in
the volatility in the markets this week. I think one way I think about it is you know we've had an era of gradual but limited
rate rises being the only thing that was ever on the horizon. You know that was the era of forward guidance. And we know that
now. And I think markets particularly after this week's press conference know this is a slightly different fed a different
regime. What we don't know is whether we're losing both the gradual and the limited or we're just going to be going a little
bit faster but still have a relatively modest tightening cycle. I think that's what people are playing with.
You know we got
even if we saw quite quite a few rate rises I mean now the market is coming around to the idea we might have five rate
rises in the US this year. There's this feeling that OK that means they won't have to do so much later on because we're still
talking about a relatively modest bit of tightening. But if that limited piece is already also gone that we're not the Fed not
just going to be gradual and not gradual but also going to do a bit more tightening than the market was expecting previously.
Well that does potentially mean that all bets are off. What do you make of Paul's comments about the idea that the Fed see
needs to be nimble on the surface.
That obviously makes sense but that seems to also spook the markets to a certain degree.
I think it's because if you think about where we are you know being nimble can feels like it can only really go one way. It
can only be in a hawkish direction because in the past we've come to the ISE we've actually come round to the view that the
Fed would tie its hands with forward guidance and allow it not put itself in a position where it's reacting to every bit of
data as it comes along.
It specifically promised the financial markets and everybody else you know we're going to hold rates
low even when inflation is reaching the target. We're going to hold even longer than that because that's what our new strategy
implies that we're going to air on the side of having too much inflation. Trouble is once you have too much inflation by the
Fed's own higher hurdle and you've reached that tipping point for you really need to tighten.
Well that new framework doesn't
say anything about the pace of tightening. It doesn't say that that's going to be any slower than in the olden days. And in
fact it might mean that you have to move that much faster because you've left it too long. What do you make of some of the
criticism out there from folks like Bill Dudley. Larry Summers of course a contributor to this program. John Waldron over at
Goldman Sachs. A lot of are really relatively prominent people. I guess a little bit concerned that not only did the Fed not
move as fast as they wanted to see but maybe they're not getting the communication as clearly as they would like to see right now
out of the Fed. Yeah and I think there's there's a fundamental point here and
I've actually had this conversation with Bill and actually with Larry it's whether we've changed
the balance of risk changed from what we've seen in all the years since the global financial crisis and all those years
you'll remember when we talked about you know central banks facing tough decisions.
It was always the feeling that you ere
on the side of being too loose that the bigger risk was that you would send the economy back into recession or the bigger risk
was that inflation would be too low. I think what Bill Dudley and the likes of Larry Summers are thinking is that you know the
Fed still has that frame on what it needs to do when actually the risks now are on the other side. Actually the risks to the
broader economy not just inflation are greater. If we are seen to let inflation get out of control and that's that that's the
danger of being behind the curve as they see it which I think is also you know there's some sympathy among among other
commentators and even among members of the FOMC with that view. There is also I guess a question sort of baked into all this
about whether the economy and for that matter the markets can sort of stand on their own without this sort of extreme
accommodation that we've come to expect out of the Fed and from other central banks around the world.
Yeah and it's interesting.
I mean we have got used to running the economy and the markets together. What's good for the
economy is good for the markets. Of course there's been many years where the markets have done a lot better than the economy
in the last few years. Certainly in the years after the global financial crisis it was part of that era of super loose monetary
support for the economy. But you had superb performance from the financial markets even when the economy was quite flat. I think
we are moving to a world and certainly the Fed probably would like to see us being in a world where actually the economy looks
a bit healthier than the financial markets. And I think that was also the sort of what was rippling through financial markets
this week. Was the feeling that hang on the Fed doesn't seem to care about us as much as as much as it did before.
And I think
if you the response of the Fed is well because the economy is growing really strongly and inflation is really high we don't
have to worry about you. You do. You and your team do a lot of great work at Bloomberg Economics and sort of tracking economic
growth and tracking all the elements that go into that. When you look at some of the most recent data that we've gotten including
the latest GDP numbers from the fourth quarter the rise in the employment cost index as well as some of the personal and
consumer spending trends here. Does that suggest to you a healthy economy.
Well I think when you look at a lot of the data including the very latest bit of data we had on the employment cost index
which is something that the Fed looks at very closely.
Now when our chief U.S. economist Anna Wong looked at that and she spent
many years at the Fed she sees a green light to at least five interest rate rises. And even the possibility that you will see
that 50 basis point rise on the first time out which had been discounted because we know the Federal Reserve's hadn't
previously felt that that was warranted just stripping away if you just look at wages and salaries that is growing at a rate
which is consistent with inflation still being well above target well over 3 percent by the end of this year. And that's on the
Fed's own measures. So I think most of this data did confirm what I was saying earlier which is you have a strong economy and
you have inflation which is clearly for some time business to exceeding all the targets that the Fed has ever set itself for a
prolonged period. You know this this does set the tone for quite a lot of nimble rate rises.
Look a little bit more globally for
us because if the Fed does embark on this tightening cycle as most people expect them to do you have a European Central Bank
that at least for right now appears to be willing to stand pat. You have a Chinese central bank that is now appearing to
actually become more accommodative. And you have other central banks around the world lots of central banks around the world
that don't necessarily all seem to be on the same page as to which direction they want to take monetary policy. Does that
matter. Yeah and you've mentioned actually the most interesting
difference out there at the moment is that difference between the People's Bank of China and the Federal Reserve which we have
not seen in in living memory. The PBS see being able to go a different direction from the Fed because it's kind of freed
itself from having to follow every step that the Fed takes. The Chinese economy has been weakening. The PPACA is weakening
policy to support that.
It's not doing very much for Chinese financial markets but the Chinese authorities are not. Don't
mind so much about that. But it does it does provide a sort of counter force to what the Fed is doing. And actually interesting
thought for investors who've had so many years of the US outperforming other stock markets. You know I was quite struck
by the European stock market actually holding up pretty well this week despite all the volatility in the US. You know there's
many many years where people have said this is the year where Europe finally does better than the US. Well maybe this year
this will be one of those years but maybe still not a very high return. Yeah it could potentially be in. Of course a lot of that
will depend on whether policymakers I guess get in the way of that progress.
But let's circle back into the overhanging issue
which is inflation Stephanie and the idea that there are some elements of these inflationary pressures that may indeed prove
to be transitory. And that is also raising questions as to whether we do need some sort of aggressive monetary policy
tightening. Well I think there's lots of different pieces of that right. I
mean we have we do it. There's some prolonged supply chain issues though. Some companies are able to get round them. We saw
the Apple results today somehow miraculously getting past some of the supply chain issues that have dogged other big
multinationals. But you know if you look if you look more broadly you know it's not just the sort of the normal suspects
if you like pushing up prices. You know I mentioned before wages and salaries picking up at a faster rate than they have in many
You're seeing you know services costs not just in those areas that are just opening up in the economy but more broadly
picking up. So I think it's hard to argue now that this is an inflation which is just coming from key bits of the economy. I
think the place where that's most true in fact is the eurozone where energy has been a big part of the price rises so far. And
actually we're going to see more coming down the track. But in most other countries certainly places like the U.K. where the
Bank of England's already raised interest rates this is fairly broad based.
We may not be going into a high inflation area but
this is definitely not something that's just going to be a prolonged blip. All right. Well a lot to keep our eyes on.
Stephanie really appreciate your contributions today. Stephanie Flanders there at Bloomberg Economics senior executive editor.
Coming up the compensation conversation. That's up next on Wall Street week on Bloomberg. Finally one more thought. It's about keeping employees happy
with inflation up the most in 40 years and labor force participation down near the lowest in 50. U.S. workers are
finding for the first time in their careers they have an edge in salary negotiations. You see it reflected in Labor Department
data that show a surge in the employment cost index.
And you see it in data that show record high rates of people quitting their
jobs for greener pastures. On Wall Street Goldman Sachs is said to have added millions of
dollars to compensation packages for hundreds of its top executives to prevent defections on compensation. Our philosophy
remains to pay for performance and we are committed to rewarding top talent in a competitive labor environment.
Bank of America is said to have boosted pay by about 25 percent for senior bankers and is offering other employees a share in a
one billion dollar pool of restricted stock. CEO Brian Moynihan he spoke to us last week. We've increased the
compensation the company dramatically across a year. But how do you how do you make that work while you keep engineering a
company keep working on processes to take out cost and reinvest in the people. Citigroup is raising base salaries for first year
analysts and JP Morgan has boosted pay for junior bankers twice in the past seven months.
JP Morgan CEO Jamie Diamond. He says it's worth the costs to keep top talent.
We will be competitive in pay and that squeezes
margins a little bit for shareholders. So be it. But it's not just people in finance getting showered with this extra money.
Bloomberg reported last month that Apple was giving its computer engineers unexpected bonuses into the six figures to keep them
from jumping ship to competitors like Facebook. This is not something that I believe Apple has done before and this is
really an effort to retain key talent. Apple is you know losing talent right now. There are people more than usual number of
people leaving. And in the retail world Target is offering to pay the full college tuition for its U.S. based employees even
further down the scale. A record 48 percent of small business owners said they raised compensation last month and almost a
third said they plan to do so in the months ahead. All of this constitutes a significant if not long overdue power shift for
U.S. workers. But shifts like these inevitably raise the question of tipping points.
Windows what's good for the worker
become what's bad for the economy. It's a question that has to be posed and posed delicately to be
sure but it's one that is clearly on the radar of the Fed chair Jerome Powell as cited last year's surge in the Employment Cost
Index as a key reason for pivoting to a more aggressive stance on monetary policy.
In addition to the pandemic effects he's acknowledged structural demographic shifts that will likely constrain labor supply for
years to come.
And Powell knows that globalization is not going to be the savior and weighing down prices the way it did last
century which means now the Fed and investors need to prepare themselves for a new and dare I say less transitory economic
dynamic that does it for this episode of Wall Street Week. I'm Romaine Bostick in for David Westin.
This is Bloomberg..