Bloomberg Markets Full Show (03/22/2022)
From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It's 30 minutes into the trading day on this Tuesday March 22nd. Here the top market stories we're following for you at this hour faster is better. St. Louis Fed President James Bullard saying the Fed needs to be more aggressive in repeating his call for
rates above 3 percent. And the bond sell off deepens. Treasury yields climbing across the curve as a market just calls for multiple 50 basis point hikes and little progress. The Kremlin says Ukraine is dragging its feet in peace talks while Ukraine says Russia is negotiating in bad faith. We'll speak with a key adviser to Presidents Alinsky from New York. I'm pretty good at with Guy Johnson London. Alix Steel is off. Welcome to Bloomberg Markets guy. It's fascinating when we talk about simply what is actually happening in the markets what are they actually trying to price. And right now. Seems like the spotlight is on the Fed.
Oh the spotlight is firmly on the Fed. Clearly we're watching what is happening in Ukraine because that's going to be a complicating factor in terms of what happens economically. But the focus from the market's point of view is definitely what is happening here. And I have to say 50 has got to be the base case now hasn't it Kristie. Are you still as bullish with Fed speaker of the Fed speaker after Fed speaker after Fed speaker basically go a 50 50 50 50 50. Looks like the base case could be 50 in May could be 50 after that could be a series of 50 basis point hikes that affect the bullish case. I think the assumption here is
that just because the Fed hikes you're going to see this kind of massive crash in the market which to some extent is true when you kind of take the punchbowl away. But if you actually were to chart it and look back in history did this this morning I wish I had it for you. But basically if you chart the S&P 500 and the Fed funds effective rate the more it rises stocks rise with it. So I'm curious of the historical trend. It's kind of been thrown out the window right now given the geopolitical tensions. But to your point I'm still bullish. You've got to bring evidence. If you're going to bring it bring it with evidence. OK. Let's talk
about let's talk about the data next time. Let's talk about the data. Richmond Fed Manufacturing Index actually comes through at 13. The prior number was 1. The survey to show that some pretty compelling evidence that the manufacturing sector is healing and healing pretty fast and is on a tear right now. So that's going to be may be further evidence of the idea that
we are going to see 50 basis points coming through. I'm basically trying to position Krissy here as the antithesis of Lisa. Lisa very bearish. Pretty very bullish. We can have a nice little debate going there anyway as you say could be the newest Fed president James Bullard on Bloomberg TV a little bit earlier on this basically where our question of the day comes from talking about the fact the U.S. monetary policy needs to tighten quickly to stem inflation. What you have to do is move the policy rate up discreetly a fair amount not to be too disruptive. But I think 50 basis point moves should definitely
be in the mix and then get to a level that we can be neutral and then from there we can decide if we want to be restrictive and put further downward pressure on inflation. But right now we're putting upward pressure on inflation. It's the wrong place to be. Given where inflation is. So that's our question of the day. Is faster better faster hikes better from a U.S. economic point of view to get inflation under control. To put the U.S. economy on a sustainable footing. Let's kick this around. IRA Jersey. Chief US rate strategist for Bloomberg Intelligence joining us now. Wow. Have we seen a big
move at the front side of the US curve. Got inversions do they matter. And joining me here in London Bloomberg Markets editor for EMEA Christine Aquino. Fresh back from holiday. Got lots of thoughts on what is happening here. Christine let's bring it to you first of all. Paula thinks faster is better. What do you think. Well Guy you know if there's anything that markets will be worried about it's going to be pace. And so if you put forward to the markets that hey faster rate hikes multiple 50 basis point rate hikes over the next couple of months is probably the way that the Fed is going to go. That will probably spark a little bit of worries among investors because you know I think markets this year have really gotten their heads around the possibility at one point of a 50 basis point rate hike. I mean this was all the discussion that we were having in early
February before the war in Ukraine broke out. Of course that changes some of the equation. But 50 was very much a possibility for the markets at some point. But now that we know what we know when it comes to the impact of the war in Ukraine in terms of commodity prices the inflationary impulses coming from that but also the potential hit to growth coming from that the picture's a little bit more complicated. And so if you give markets kind of this hurried pace in policy there's definitely bound to raise
some eyebrows and cause a little bit of worry here. Let's bring in IRA Jersey into this conversation. I would talk to us about the radar picture because yesterday I think was pretty notable for kind of the wonkiness that was going on in the bond market. Can the markets bond market stock market even the commodity market really digest the idea of faster hikes. Well we already are digesting the idea of faster hikes. Now whether or not that's going to actually help the economy or not is a different story. I think that it's going to be impossible at this point for the Federal Reserve to hike anywhere near what
they're talking about and not slow the economy into a recession. Now it doesn't necessarily have to be deep you know really bad recession. It could look a lot more like the 1992 to 94 period which really was was a relatively shallow recession. But but the Fed almost has to put us into a recession at this point in order to fight inflation because they have to bring demand down. And and in order to bring demand down by definition you have to slow the economy.
The market's already pricing in fact for a recession next year when you look at the shape of the yield curve. So Guy mentioned given the shape of the yield curve you just mentioned the wonkiness in the yield curve a little bit over the last couple of days and we're price for a recession for 2023. So you know in order to avoid that the only way the Fed can do it is to go slower. One last thing I want to mention about James Bullard. Remember in 2008 he wanted to hike interest rates because oil
prices were high. That would've been exactly the wrong thing to do in 2008 in the middle of the financial crisis. So keep in mind that that historical context of his own statements and in terms of how hawkish he is. IRA the market's got the peak in yields. June 23. It's got cuts price for June 24. Do you think that is about rights. Do you think that's all. And if so by how much. Well I do. Obviously the market is pricing that which is one of the reasons why I noted that that in order for the Fed to avoid that needing to cut in early 2024 that they're going to have to go slower than the market's currently pricing. Now will they. Will they go slower. Will they hike of 50 in May. Yeah maybe they'll hike 50 in May. But I think the idea that like I
know one of the street banks came out today thinking they were going to hike 50 in May and June and then go another hundred basis points in the second half of the year. That is going to create a lot of market turmoil. That will certainly invert the yield curve a lot more and I think pushes into a deep recession. So I do think that the Fed's going to go slower than that. The question is how much lower. And I do think that they're still going to hike. The question is you know that pace that was just
talked about a moment ago I think has to be somewhat slower than people are thinking right now. Christine hop on in here and hopefully balance this a little bit because it seems like a lot of doom and gloom but as you kind of heard CAC mentioned at the top the hour I kind of am taking a little bit of a bullish stance. Is a recession guaranteed. If you have these commodity shocks if you have this aggressive rate hike is there no other option to kind of avoid it just given the strength of the consumer that especially you're seeing here in the United States. Well Kristie yeah I think that's a very good point to make that you know a recession even though that was potentially something that we saw in previous hiking cycles and in the aftermath of that. This is a very very different sort of economy that we're
looking at particularly in the U.S. as you rightly pointed out for us. The man is still very very strong. The labor market obviously very buoyant as well. And I think that's partly why prior to the break out of the war in Ukraine it really was. Investors were definitely buying into the idea of a potential 50 basis point rate hike from the Fed because it really looked like the economy was firing on all cylinders. And now you know I think what the war does is to maybe slow down that process a little bit. But I think now that we've heard from Powell and
really gotten an insight into how the Fed is thinking about the inflation growth balance we know that they are very much focused on inflation. And that really is just driving home. The point again to markets that this will be the priority for the Fed in terms of its policy responses here Kyra. Equity markets are rallying. Do you think the Fed's going to be comfortable with that. Do you think that's basically signaling that the markets are not in the right place yet from the Fed perspective how are they going to be reading what what risk takers are doing right now. Well so the one good thing about inflation which we haven't had for the last three or four economic cycles is that you can keep profitability reasonably high rates of equity markets and risk asset markets don't have to do particularly poorly even if we have a significant slowdown in the economy. And look I think
we're looking at the wrong thing right now when we're assessing the overall growth of the economy. We're looking at nominal sales and nominal consumption. You can't look at that anymore with inflation at 7 percent or look at unit sales. They're already falling. That's a sign that we're we're likely to see a significantly slowing economy going forward even if prices keep on running at 3 or 4 percent which is also what the market's pricing for guy which is the reason why I think a lot of people are concerned that the Fed's going to go too far and become much more restrictive. Maybe then they need to. It's because you know high and high commodity prices are going to keep headline inflation much higher than that than a lot of people really want. Well thank you. Bloomberg's Christine Aquino and IRA Jersey of
blueberries held us. As always we appreciate your insight. Well we're going to get a better take on that. We're gonna speak to Jeff Lacker a former Fed official coming up on simply how to adapt to a hawkish Fed. Coming up next though we'll talk with the chief strategist at principal global investors Sima Shore. She's coming up next. This is Bloomberg. St. Louis Fed President Jim Bullard says the Fed needs to be more aggressive in tightening monetary policy. And repeated his
call for rates to be above 3 percent this year. So our question of the day asked just that is faster better or faster hikes better. Let's ask Sima Shah chief strategist at Principal Global Investors Sima. Thank you so much for being with us here. Give us your take here. Are faster hikes better. Do you agree with James Bullard. I mean it's not like it's going to. It's clearly going to help inflation come down. And perhaps if you have faster hikes and it means that they don't need to hike as much. So I guess that's a positive. But
overall I think what I was was suggesting is is a clear negative ultimately for the for the US economy. If you still have to have the same terrible rate but a faster pace of this than you know I think the risk of recession spending increases pretty drastically. Sima what's your base case right now. Because certainly the Fed speakers I've been listening to over the last 24 hours sound very hawkish and 50 increasingly looks like it's the base case right now for markets. So I think what we're expecting is we are. It seems likely that there will be a 50 basis point like at some point this year especially with inflation at this level and still rising. Now beyond that I would think that we'd expect the Fed to hike aggressively in the first course. Really front load this hikes
and then maybe give himself a bit of a breather towards the end of the year. Now remember if you get to where the Fed dollar was if you get to two rates at one point nine percent by the end of this year that's just taking you to just about where rates were. Pre pandemic. Remember pre pandemic there weren't really any concerns about U.S. recession. You know we had a pretty strong economy very robust. So I do think that the U.S. economy can handle rates of that level. It's when you get into the restricted church when you get set to put a certain level that was in the dot plots and twenty twenty three then I think you have to start thinking about economic slowdown the recession. Sima I'm curious about one piece of what you just mentioned
essentially that it gives them a little bit of room to breathe by the end of the year. That's my question to you. We have all these kind of recession odds being priced into the market. What if the Fed does have a little bit more room to perhaps cut rates in the future which of course the market is pricing is a recession still guaranteed for the United States. Well I think for the Fed the intention would be to raise rates and then hold them back. If they want to have that cushion to be able to cut in times of real stress. So you know they're only cut if the recession companies and I think that's key. So what we would anticipate is if the Fed can get it right they raise rates this year. They gave themselves a bit of room to go
quite gradually next year. And then they have this glide path. Now unfortunately we know from history it's quite rare for the Fed to ever be able to bring inflation down from these kind of heights without precipitating a slowdown or even a recession. So I think the odds are certainly not in their favor in this. Okay. So a soft landing looks like a tough ask right now. Let's talk a bit about what that means for asset allocation. Bonds don't look like a great investments according to most people right now. Credit looks a little bit shaky. Equities though it really seems quite pulled up on equities seem. Are you in that
camp as well. We're somewhere in that count I think. I think we are positive for equities for this year but we still think that the U.S. economy is pretty good fundamentally. We look at the strong balance sheets we look at the household sector which is extremely strong. To this point and we feel quite lost about
equities. Are we going to see very very strong returns this year. I don't think so. I think we're going to see single digit returns so significantly lower than 2020. Well but as I said before I think the concern really goes when you when you think about 2023 and then at that point and I think setting off parts of equities will be challenged. And this is really the time when
you picking out of sectors picking up specific companies becomes key. It's not enough. Once the Fed is no longer keeping rates very very low. Not everything is going to keep keep rising. So investors need to become increasingly selective as this year goes on and as you saw as this year goes on as early into 2023. Seem I'm very glad you mentioned that you were bullish as guys went out multiple times. I am as well. But I'm curious though about the other side of the equation. When we're talking about higher inflation we're talking a higher commodity costs. But to what extent is the market actually digested the impact of that especially to the end consumer things like planting season in Ukraine for example that still remains unknown. The market is
still very wavering on that when it comes to food prices. How much of that can you tangibly say. The stock market or even the underlying economy is actually prepared for. It is a great question. You know when we think about what we've seen for the geopolitical crisis so far. So there's going in waves right. We sort of talking about oil prices. Then we sort of thinking about oh look what about the overall commodity space. Then you get into feed prices and then you think about fertilizer and ultimate. What you're doing is you're increasing the bandwidth of that impact of this geopolitical crisis across sectors and across regions. So as of today some parts of emerging markets some of there's oil on this commodity export
does look like they could do pretty well from from the rising prices. But actually when you dig deep and you start thinking I fertilize it then I think there could be some concerns growing. So that's interesting because certainly the trend of late over the last few years has been that geopolitical shocks have an ever sort of decreasing half life i.e. the market moves on from them increasingly quickly. Do you think that's going to be the case this time round. I think the sticker shock of this conflict has already passed. Or do you think actually there is more still to come that the market isn't even aware of yet. So I think
you're right. So in previous crises what we said we have done a fair amount of analysis looking into previous crises what happened. And typically on average you should be S&P 500 for 7 percent. It took three weeks to get to the trough. Another three weeks to get back to the pre crisis level. And typically twelve months out markets are up. But the times when that didn't happen where the market really struggled for a prolonged period was when the macro backdrop was impacted by the geopolitical crisis. Now in this situation of course we have commodity prices which is really key. But also Russia as an economy is very much ingrained in the global economy. So I think very different to what you saw with Syria with with Iraq with a
number of different places. So the sanctions are also going to have a reverberation across the global economy. So I think it's not probably going to have a more prolonged impact of this geopolitical crisis beyond just this month. Of course who knows how this goes or. I certainly can't predict. I don't think anyone else can. But I think we do need to be more. We need to
recognize more that the impact could be beyond just what's obvious. Sima I'm curious about simply capital flows here in times of crisis as you mentioned. Wherever in the world you may be there is a historical tendency to quickly go to American assets whether that's bonds whether that's a dollar. Well that's the US equity market tech of course being the heavyweights there. Could you foresee a situation where you do start to see even in the face of decelerating growth some of those flows come back to the United States and push the similar gains that you saw in the last couple of years perhaps not double digit but similar gains in terms of that's what's driving some of the equity action.
I think that the US will probably be the outperform when know everyone relatively weak but the US outperforming and it's exactly what you said. Not only is the US a safe haven but in this specific crisis the US is less exposed. No it doesn't. It's a currency exporter. It's more energy efficient in terms of consumption. And it doesn't have the trade linkages like it would fit for Europe. So I think there is a case to be made that the US through all of this is going to come out a little bit
stronger relative to other regions. And certainly that should help drive performance in the US. Zima great stuff as ever always appreciate your time. Thank you very much for today since Shery Ahn principal global investors. Thank you very much. Maybe that's the reason why it a little bit more bullish. She's over there and I'm over here. Okay. Coming
up the NIKKEI market begins to stabilize after that unprecedented squeeze. The sent prices spiking. We're gonna hear from the CEO of the LME next. This is Bloomberg. So things are finally getting back to normal for NIKKEI traders on the London Metal Exchange prices trading within the LME daily limits which of course have been expanded for the first time since reopening last week.
Earlier we heard from the LME chief executive officer Matthew Chamberlain. The fact that we've gone limit down though for the last four days does suggest that clearly that the price had been inflated by that short squeeze. And it is now logical with the situations around that squeeze having been resolved that we would come down to a more normalized level. And obviously the Shanghai prices is a good a good guide there. Today will be trading down into the year with the limit our ability to go down into the 26 thousands. And I think there is a good chance that we'll discover a price over the next couple of days possibly
even today. Good morning Matthew see if now had a couple of weeks to consider what's been a pretty hectic situation. What do you think you went wrong. I know there are many cage parties involved but I specifically want to pin you down to what do you think the LME did wrong or could have done better. Yeah. So I
think we've clearly been dealing with the with the immediate challenge and there's gonna be a lot of time for us to reflect on the lessons learned. But I think that there's a few points that I would make. The first is held this squeeze worked how this position was allowed to arise. And I certainly think that we need to look more closely again at oversight of the RTS markets because clearly this is an issue that came from the RTS markets and then impacted the exchange then as has been well publicized. We have had challenges in delivering our price limit. So. So in order to bring the market back to normality we needed to make technical changes to our systems to allow us to limit the price going down on each day. And that's not something the LME has ever done before. And we worked very quickly to bring in that price limit technology. And we clearly ran at that
hard so that we could get the market reopened. There have been some some well publicized glitches which I don't think have made a difference. The fact that we just went limit down each day but clearly have been embarrassing to the LME. And again that's what happens when you have to deliver these things that seemed to reopen the market. That was Matthew Chamberlain the LMA CEO speaking with Bloomberg's Anna Edwards and Mark Cudmore guy. What's
fascinating to me about this story is this bringing kind of flashbacks back from early 2020 when you start to see the markets crash so violently and every time futures opened you would see these kind of limit up limit downs. It never occurred to me that this would happen with Nicole. So there's a bunch of things happening here one of which I think he talked about the RTS nature of this which I think is interesting. A lot of markets have been forced into using clearinghouses. I wonder whether that's next. The other thing is with this kind of volatility the big trading houses are really struggling. I'm wondering whether there calls for more liquidity from central banks or others will be needed. We certainly see
that in private past crises. He's front and center. Susan Lewis Fed President James Balog speaking earlier. We're going to hear from former Fed chair Jeff Lacker. This is Bloomberg. One hour into the US trading session a little bit of green on the screen bloomers Abigail Doolittle is tracking the moves.
Abby what do you see. Well Kristie here's your bullish view here. You are right on stocks being higher. The S&P 500 up nine tenths of 1 percent. The tech heavy NASDAQ up even more of one and a half percent. This after yesterday falling modestly. But remember it follows the best week since November of 2020. So overall right now we have this upward this risk on whipsaw for stocks. And you can really see it also with the Russell 2000 and the banks up 2 percent. Now let's take a look at what's driving the banks. And it's impressive that the tech heavy Nasdaq is up so much because take a look at this 2 year yield. Really
incredible over the last few days up 23 basis points. It's really just amazing. Although if you recall a few weeks ago it was up 25 basis points in a day alone. So this huge back up in yields yesterday of course on the much more hawkish talk out of Fed Chair Jay Powell. In fact it has the two year note on pace for its worst quarter going back to 1984. If we take a look at this in the Bloomberg terminal we will see on the quarter so far this is just amazing.
The two year yield basically up one and a half percent. If you recall it wasn't so long ago we were talking about will the two year old beat or excuse me the 10 year yield. Will it be at one and a half percent. Well here is the 10 year yield. Again matching the worst quarter almost on pace for the worst quarter going back to 1984. And guy that of course it was when Volcker was the Fed chair. You can see that ripple effect of his hawkish stance back then. Very firm stance showing in this chart right here strongly. Well Abigail Doolittle too little. Excuse me. Thank you so much for tracking those moves. Let's talk more
about the Fed here. St. Louis Fed President James Bullard saying that when it comes to raising interest rates to fight inflation faster better bowler speak to Bloomberg International Economics. A policy correspondent Michael McKee faster is better. And I think that 1994 tightening cycle or removal of accommodation cycle is probably the best analogy
here. That one was quite successful. The Fed moved 300 basis points in a single year and then made some adjustments afterwards in nineteen ninety five. The result was that we hit our 2 percent inflation target over the next 10 years. The economy boomed in the second half of the 1990s. So I think this is a situation that's like that. We came out of the pandemic. You got surprised by inflation. But now what you have to do is move the policy rate up discretely a fair amount not to be too disruptive. But I think 50 basis point moves should definitely be in the mix and then get to a level that we can be neutral.
And then from there we can decide if we want to be restrictive and put further downward pressure on inflation. But right now we're putting upward pressure on inflation. That's the wrong place to be. Given where inflation is. Well as I noted the markets whether you look at swaps or futures are now pricing in 50 for May force. The Fed doesn't like to surprise the markets. Should we assume that that's what you're going to do. Well I I can't I'm just one person on the committee. I don't know where the rest of the committee will be. And the chair has to manage that process. I thought that was a good speech yesterday that laid out the situation and we'll see where we are when we get to May 4th. The economic data have been closely
watched. But from what you're saying it doesn't sound like it really matters between now and May that we're too low in terms of the Fed funds rate and inflation is too high. And those are the only two considerations. Well that's the big picture. And I think that's right. That we don't really need a lot of more data here. But you never know in
this world and in this business you can always get surprised. Obviously you've got geopolitical risk out there. I guess my feeling on that is that you know we can't wait for that to get resolved. This could go on for a very long time. And certainly geopolitical tensions even if the war ended tomorrow the tensions would last for a long time. So I think the best contribution we can make is to get our house in order and make sure that the U.S. economy is doing as well as we can
achieve. And that will be the best that we can do to contribute to the global situation. So Lewis for presidents Jim belongs in an exclusive interview with Bloomberg Television a little earlier on speaking to Michael McKee. Let's get some reaction. Former Richmond Fed President Jeff Lacker joins us now. He's now an economics professor at Virginia Commonwealth University School of Business. I promoted you earlier to former Fed chair. So I apologize for that Jeff. Let's talk a little bit about the current market pricing 50 in May 50 the Meath meeting after that. Do you think that's about right. If I was at the Fed I'd I'd be advocating for a series of moves like that. The story of the day here is that the Fed is trying
to recover. Its credibility was badly damaged last year by the misdiagnosis of inflation and then the protracted delay while they cleared out their tapering process. I think that they made a big step in the right direction with last week's meeting. The messaging around that it wasn't credible there. Their economic projections don't hold together. They're not really believable. But their move in the right direction to indicate a series of rate hikes this coming year. I think Chairman Powell yesterday. Him in that speech was a recalibration tightening of the hawkishness. I think he realized that the messaging around the meeting last week was was not coming across. Well I expect more of that in the future. But messaging alone isn't going to do
this. The Fed spent the entire decade of the 70s proclaiming loudly that it wanted inflation to be lower but it took actions in the early 1980s rather than speech to actually bring inflation down. And I think the same thing's going to be true this time around. Jeff I'm so glad you mentioned the 70s and the 80s because I think there's a saying out there that history doesn't repeat what it does often rhyme. I'm curious what the precedent here is for a move like this. I mean obviously we've
never really dealt with a pandemic at the scale before. But should we be looking to the 80s in terms of demand destruction or 1994 in terms of hikes that are bigger than 25 basis points. What's your take in terms of where in history we can might see a little bit of a roadmap. I think Jim citing nineteen ninety four is apt. Now that the Fed at that time period didn't do much at all to telegraph moves we're in a different environment now where the game is to telegraph ahead of the meeting. But still I mean it's an indication that the economy Kitty and financial markets could
pretty well withstand 50 basis point seventy five basis point moves if needed. I think that precedent is there. I think that the aberration was 2004 when Greenspan bent over backwards to telegraph that the pace of the move and when the moves would begin. And so yeah I think 50 years is not untoward. Jeff sorry just to back up a little bit. Are you putting 75 basis point hikes on the table here at a single meeting. You know not now but you know if they move with alacrity they should be able to do it. But it could happen. I mean what's going to what I expect to play out is that inflation is not going to come down in the middle of the year all by itself as the Fed has laid out. As Chairman Palin described last week I think that it's going to persist. There are a lot of forces pointing in that direction towards more inflation momentum going forward. Wages have accelerated firms are passing on costs and
so on and so on. But in addition so inflation's not going to come down the way they think they're going to be forced to raise rates faster. And that's going to call into question their labor market forecast. I don't think three point five percent unemployment at the end of this year and next year. Is it all plausible. If they if they're going to
raise rates enough to make progress on inflation what we'll see over the end of this year towards the end of this year is an answer to this question. If they're faced with the choice and I think they're going to be faced with a choice which do they choose. Do they choose to fight inflation first and let labor market until after that. Or do they soften their stance on inflation when unemployment starts rising. That's the sixty four thousand dollar question
facing. Jeff I'm curious about the commodity side of the equation. We know that those oil prices have really been the key driver when we're tired of these inflation costs. But there's a lot of commodity shocks that perhaps have yet to come. Have yet to be digested by the economy and by the market. Food prices are for one example that I'm especially watching. How much does that factor into the Fed's decision to perhaps curtail even more of
that demand. So when commodity prices roll in if they're transitory the roll out again what they do to inflation on an ongoing basis depends entirely on how the Fed handles it. When commodity prices are high and other prices haven't risen yet what you'd like is for people to wait to postpone spending until commodity prices are low. And the way to do that at least in the Fed's toolbox tool box is to raise real interest rates which increases the reward
for waiting. So it's not obvious that commodity price shocks should lead to easier policy times. They should lead us to a tougher policy. Is a soft landing at this point possible. Do you think Jeff. Now we're either going to get through they're going to get inflation down or unemployment is going to stay low but they can't do both. I just think that opportunity has passed them by. I think they missed the chance for that. Jeff how much room do they have for a U-turn here. How much breathing room have they really perhaps given themselves or will give themselves by the end of the year. I know rate cuts are priced in for 2023 potentially 2024. How much breathing room is there really.
So they're claiming mid-year inflation is going to sag so June July and August. Those meetings I think are going to be telling if inflation is not falling if it's not softening its staffs undoubtedly projecting for them then they're going to be faced with the choice whether to tighten you increase the pace of tightening or sit tight for a while. And so they they basically have until then. I mean they'll throw in a 50 in the next two meetings maybe two but and see where we get. But I think they have until midyear to really demonstrate that their hope for inflation coming down on its own with their modest pace of tightening built in is is actually viable. What about the balance sheet. Jeff what should they be doing there. Actually that's B on rails in terms of the run off or do they have to be more dynamic with it.
I don't think they want to be dynamic. I think they need to be and I don't think they will. I think they'll put it on a faster track but I think they'll do it in the same sort of formulation where there will be a cap on the amount by which their holdings fall any given month. If they're wise they'll roll off the housing stuff. The mortgage backed securities fell more rapidly and get out a lot faster than treasuries. But I think that he signaled pretty clearly that they want to do it faster. I wouldn't be surprised at all. I'd be surprised if they don't announce a roll off at the next meeting. Jeff you're an economist by trade but I'm curious about your market take here. I kind of have to keep
it high on the bond market at these times. What is your take on what the bond market is pricing here. I think we're looking at seven rate hikes throughout this year. Is that a plausible bet to be making. Church I mean I don't I think it's going to take more than that to really get inflation under control. I think they're taking care. Powell at his word that the committee is committed to reducing inflation and views that as a prerequisite for employment growth. So they they view him as making the choice in the direction of bringing inflation down. I think that there at first last week I think the markets maybe took the Fed's projections too seriously. I don't think they they were skeptical enough about them. Now they're they're a little
skeptical about how much rate hikes are going to be required. And I think that solution to the puzzle looks at last week's projections. I think it's the right one that what they've sketched out requires faster rate hikes than they put forward. So I think the bond market reaction seems well warranted. Jeff Lacker former Richmond Fed president and economics professor at the Virginia Commonwealth University thank you so much for your expertise and your time as always. Coming up what will it take for Ukraine's president Zelinsky and Russia to reach a peace agreement. We'll talk with one of the ones Keith advisers Cambridge economics professor Alexander Rodney ASCII. This is Bloomberg.
This is Bloomberg Markets I'm sure you could tell you're looking at a live shot of the principal room coming up David Salvi the uncle managing director and portfolio manager. That's on Bloomberg Markets The Clothes. This is Bloomberg. So the Ukrainian presidents of loonies Alinsky has called on Pope Francis to mediate in the war with Russia. In a tweet Zelinsky said he told the pope about the difficult humanitarian situation that the country is facing. Meanwhile the Kremlin once again said the peace talks are going more slowly than it would like. Let's talk more about those talks. One of President Zaleski key advisers is Alexander Rodney RTS. He joins us now. He is an associate professor as well of economics at Cambridge University. Alexander run the RTS.
Thank you very much indeed for your time. The president President Zelinsky is talking about maybe some need for some divine intervention in terms of these talks. Let's talk a little bit about where we are. You have a useful insight into the progress that is being made. What can you tell us about how far the talks have gone in terms of securing some sort of a lasting peace and how much further there is still to go. Well first of all thanks for having me. So we're in the talks already. We have to give them a chance. Of course I'm a little pessimistic as far as their prospects are concerned but there are certain issues on which we can reach an agreement relatively easy. Those issues concern than charity status for example as long as we have tangible security guarantees that are given to
us unlike in the Budapest Memorandum. So we're willing to talk about that. There are other issues that are basically nonexistent but important for the Russians something like the Russian language let's say. So we'd never had any issues with that. So that's relatively easy. But there are of course certain points which are completely off the table. Anything that
concerns of sovereignty or territorial integrity that's never going to be discussed. Now as far as divine intervention as you say that's good. We have to give peace a chance. Alexander this treaty in New York. Thank you again for joining us. I'm curious about a potential meeting between Zelinsky and between Putin. Is that something that is potentially on the table. Do you think that could help perhaps speed up some of the progress in the talks. Well certainly we have to do anything that we can to speed up the talks or have any success. We have to give any type of
negotiation a chance. Unfortunately the Russian side hasn't been willing to talk to us directly. The Russian leader hasn't been willing to talk to a president directly for a long time. So we don't see a change in sort of and in that sense. But we have to give it a try. ALEXANDRA do you think that the Russians are negotiating in good faith. There is an argument that says that they are talking because it provides cover to further their objective on the ground. What do you think to that arguments. What do you think about the idea that the Russians are not negotiating in good
faith. Yeah so this is my fear. I'm saying this for some time. This is in fact quite a realistic possibility because we see that what is happening on the ground is not really consistent with what they've been saying in these peace talks. You don't look for peace and intensify bombardments of our cities. These two things don't go together. So there is a serious concern that they're using these peace negotiations as a trick to deceive the West into thinking that peace is around the corner and therefore further sanctions are unnecessary. So this could be a sort of strategic ambiguity on their part to signal to the West that look we're actually you know trying hard here but in fact they're just preparing their new offensive. And this is all a deceptive. So what can be done to perhaps counteract that is that something you're waiting for in terms of sanctions. Is there more that can
be done there or more from European governments. What would help. Like you said more progress. Yes I think this is this regime has proven over the years that it is IBEX only strength that only understands the language of strength. It has been deceiving consistently throughout these years. We heard that there was no troops in Crimea. Next day there were troops in Crimea in the build up to this war. We heard this was only a military exercise. And then we saw what happened. So we can't really trust them. What we can do is put pressure on the Russian regime economically. That means increasing further sanctions as far as the revenues from oil and gas sales to Europe are concerned. So an oil embargo or a gas
embargo would really help in the sense of bringing Russia's war effort to an end because Russia's war effort is financed through these sales of gas and oil at this stage. So that's why it's Ukraine. OK. Alexander why is Ukraine allowing Russian gas to transit its territory if that is the case. If Europe should cut off Russia in terms of an energy supplier why is Ukraine still facilitating the transit of that gas. Well remember we were also receiving fees over the years for for the transit of gas through our territory so this wasn't happening for free. Now of course you know the type of the
reliance of a budget on these revenues on this stream of income is negligible at this stage. And of course you know what we care about most is bringing Russia's war effort Russia the war machine to a halt. And that can be done by putting them into serious fiscal problem. And that will be done through an oil and gas embargo in Europe. Well let me pick up on that topic. If you're talking about transit fees that you're actually getting how much are you actually getting and how much are you still waiting for in terms of offsetting perhaps some of the losses of the war. Well I mean you can look up the numbers but it's at this point it's insufficient as far as you know our actual expenditure needs are concerned. So so what's more ominous here is bringing Russia's war machine to
an end. We have a serious fiscal concern too because our economy is collapsing. We can't really put numbers on this at this stage but we know that we've given a percentage change percentage in this in terms of GDP growth. So we're really facing a disaster in terms of what's happening to our economy. Absolutely we'll come to that in just a moment. It was interesting to hear the Germans today talking about a Marshall Plan. Before we get to that can I just return to the issue of the talks. There is an ongoing and serious concern and this is being vocalized by the US president and others that Russia is
prepared to use chemical weapons if chemical weapons are used. Our talks still possible. Well I hope this is really a red line if that happens. We've seen you know episodes in the past where the red lines have been drawn in the conflict in Syria for example and then not implemented. So we're obviously wondering in Ukraine what else needs to happen for the world to take this more seriously if there is the use of weapons of mass destruction of which kept chemical weapons are one type that we really hope nobody will just sit back and watch what happens. Of course we hope there'll be an intervention. We know that chemical weapons could be used at this stage because Russia is facing serious issues taking our cities. We can't really take our cities without serious losses to their troops or without destroying our cities. And so from a
brutal militaristic perspective you know the use of chemical weapons could be a solution inverted commas to them. But we hope this won't happen of course. Well in terms of the talks at the start of the interview you mentioned that the territorial conversations were a hard no from. From the Ukrainian delegation. But I'm curious about the specific regions of
Donetsk and Lugansk in particular. Are those just given the separatist movement there. Is there any wiggle room when it comes to those territories in particular. Well as far as we are concerned we're not going to compromise on sovereignty. We're not going to compromise on our territories. So there is no wiggle room as you say there is perhaps wiggle room to our neutrality status although again we're just saying we're putting off the NATO accession talks for now. NATO has
basically said no to us. We're also in the middle of a war. So as long as we're giving security guarantees we can talk about that. But there is no wiggle room as far as our territory is concerned. And if you ask the people who live there they're not willing to take any willing wiggle room. They're not willing to discuss the deeper.
In terms of the the. The rebuilding of Ukraine. Where are we to get to a point where it will be possible. The Germans are talking about a Marshall Plan. What would that and the Marshall Plan need to include. What do you think it would need to look like. Put your economists hats on for a moment. Well of course look our infrastructure is destroyed. So this would have to be billions and billions. We need a really big program for Ukraine that would primarily in the early stages be focused on rebuilding our infrastructure. Our bridges our roads
have been completely destroyed. And large parts of the country actually they've been just build up reasonably good reasons. Lansky had a program that was really focused on Alexander. Do you think. Do you think joining the EU would be a necessary prerequisite at that point. Well joining the EU would of course helpless because again we would be getting funds from the EU we would be getting we'll be integrating with the EU will be part of the common market in the EU. Of course that will help us. But at the same time we understand that this is not something that happens overnight. We
also have to build up our institutions. In many respects our economic institutions which are still lagging. So we know that we have to do our homework and we've been doing a homework in many respects. So joining the EU would definitely help but doesn't happen overnight. Alexander really appreciate your time today. Thank you very much indeed for joining us. Alexander Rodney RTS adviser to President Zelinsky thank you very much indeed. This is Bloomberg.