im assuming yesterday youre listening to this testimony and validated what you thought is a good thing yeah absolutely i mean the facts very behind the curve theyre still adding monetary policy stimulus even as the economy is overheating even as the supply of labor is quite tight so theyre behind the curve and they need to free up some space so they can actually have greater optionality in terms of the timing of liftoff and im sure pauls testimony based on that theyre going to do that at this next as ive seen theyll accelerate the taper finished by midmarch that means that the possibility of liftoff can start at the march meeting or are somewhat somewhat later even then would they still be behind the curve we still got another few months of stimulus being added to the economy bill how do how does the fed get in front of this inflation story what does it need to do does it want to be in front of this inflation story whats interesting about the market reaction is markets are not acting like the fed is behind the curve you look at the federal funds rate that the markets expecting for the cycle its only about one to half one and three quarters percent thats very consistent with what inflation is doing and how late the fed is is in responding to that that inflation risk so i think that the markets going to have to be significantly priced at some point the fed will probably have to go faster than what people expect the price to go higher than what people will expect and thats going to be a bit of a shock to financial markets well bill thats interesting point because we were discussing this yesterday and seeing what the market was pricing in was maybe more aggressive rate hikes but a lower terminal rate it does not last as long it didnt go as high for example how unprepared you feel i guess the market for this area that youre outlining i think is very ever bring as you pointed out yesterday it wasnt about increasing the amount of tightening bill built in by the fed being more concerned about inflation which is pulling it forward so theres more rate hikes priced into twenty two point two in the first half point twenty three theres virtually nothing beyond the middle of 2023 24 25 in the terminal rate is really really low so i think theres still you know i think people are overestimating how easy it is going to be for the fed to get inflation under control the idea that the fed tightens three or four times in the awesome inflation just melts away i dont think thats how its going to work the fed reserve has to tighten sufficiently to to essentially slow the economy and prevent the economy from overheating and so its going to take more than whats priced in today to do that well we havent had a credit cycle are we about to have one i dont think were gonna have one really in the very near term because the set is still on hold for a while the fed is expected to tighten moderately over the next couple of years and earnings growth is really really strong right now so i think the credit cycle is going to happen but its only going to happen when there is a realization that the fed reserve has to do quite a bit more you know even the fed reserve itself thinks that the peak in the cycles will be quite a bit higher than what markets raised and if you look at the summary of economic projections they view a neutral short term rate with a 2 percent inflation as students 3 percent inflation is well north of 2 percent so if theyre going make monetary policy tight they see that the rates are going have to go well above 2 to 3 percent so thats you know theres theres a theres a disconnect between market expectations and what the fed thinks and what the feds going to have to do with respect to inflation yeah fair enough i mean i feel like the markets led the fed for the last few years when it comes to this i want to get your take on whats happening with the long end of the curve take a bit of a bit different than yesterday but when we saw sort of the front end rate really rise and the back end did not flatter flatter flatter the 530 for example the flat since march of 20 20 does this throw some cold water on the idea that the fed is suppressing long term rates they have been not easing they have been paring back some they have been tightening those financial conditions and yields havent really moved i think the hard part to evaluate is the effects of the feds asset purchases at a time that the treasurys borrowing needs have actually fallen so the fed is taking out a lot of treasuries from the market relative to the net new supply and so i think were not really going to get a good sense of where the treasury market should actually perform in the longer run until the fed essentially backs away from quantitative easing and thats still you know three or four months away what is the current paradigm do you think that the fed is operating with we clearly probably have worked our way through a symmetrical inflation target what comes next well the paradigm that theyve been operating with is the idea that you know we have trouble pushing inflation up to 2 percent therefore we have to prove the limits of maximum sustainable employment and it turns out that was the problem of the last cycle but thats definitely not the problem this time because theyre missing badly on their inflation objective currently even as they still think theres some slack left in the us labor market so that regime that theyve put in place is just ill suited for the current set of circumstances its something thats been happening that has been quite strange is that the job market continues to be really solid and job openings are plentiful and consumer confidence keeps rolling over debt is inflation to explain for that what is the biggest issue i think inflation it absolutely was that i would explain it otherwise it makes it makes little sense why would kailey leinz be going down as the economy is recovering and the job markets are really robust scarlet fu because higher inflation is crimping peoples disposable income and theyre feeling the strain of buying gasoline buying groceries that things are much more expensive than they were a year ago bill what is your global perspective on what is happening here is inflation a us problem is it a is it a eurozone problem is it going to be a problem in japan because if the last two dont see the same issues that the fed sees then they are going to act as a as a kind of counterpoint to the liquidity squeeze the fed is going to put on we could potentially see the ecb in the bmj counselling that i appreciate the global liquidity will still fall but nevertheless were still going to have two major providers in the market so far europe is fine the us just not quite as severely in terms of the amount of inflation pressure but inflation has gone up quite substantially in europe as well a little bit less know supply disruptions because they didnt lay off a lot of workers when the pandemic hit so there havent the companies havent had to scramble so hard to get their workforce back in place and in japan were not seeing much inflation at all so though japan is still in a very different place from the rest of the world and thats been the case for for some decades now hey bill before we let you go jay powell yesterday made it very clear like the next two weeks him dad is gonna be super important you got the cpi and the jobs number friday you also have a case count if we see any rise here in the us or micron and i wonder whats the number one thing youre going to be reading between the lines well i dont think the economic data is going to dissuade said injuries what they do at the next meeting we know that labor market is strong we know we have an inflation problem regardless of what the next fair weather report looks like or whats the next consumer price index report it looks like the big wildcard of course is the new variant and if that turns out to be very severe short term very contagious and very severe outcomes in terms of people who get sick you know could that affect the feds decision making yeah it could but i think its just jay paul made it clear yesterday even if the variance turns out to be bad it has demand effects but also our supply of is not clear that demand effects would be more important than the supply so i think that you know youre pretty locked in for a celebration to take risk the next meeting two weeks from now