caroline: from bloomberg world headquarters, and caroline hyde. romaine: i'm romaine bostick. it is all we talk about here. fed chair jay powell in the fed, that is what they talked about. the central bank could scale back as seen as november and complete the process mid next year. we are going to focus on that in the various risk of their facing the taper timeline from the u.s. political deadlock, to china, to

covid, all of the things that may disrupt the timeline. we are also going to talk about the relationship between the fed, rates, and inequality. is inequality pushing the fed to do what it does, or is the fed fomenting that inequality? let's hear what fed chair has to say himself. >> i continue to expect that it will be appropriate to remain the percent target range for the federal funds rate until labor market conditions have reached levels consistent with the maximum employment and inflation has risen to 2% is -- and is on track to exceed 2%. if progress continues as expected, the committee judges a moderation may soon be warranted. while no decisions were made, participants to generally view that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year,. . is likely to be appropriate. at five omc participants forecast these favorable economic conditions will be fulfilled by the end of next

year. the median projection for the appropriate level of the federal funds rate lies above the effective lower bound in 2022. romaine: he is talking about the favorite economic things this year. we talked specifically about this idea of inflation mandates. apparently they cut my mic. caroline: that battery juice has just run its course. we can hear you faintly. focusing on what was being said by fed chair powell. we have a tapering timeline. while we get romaine ramped up with his batteries, let's get insight on the fed decision. chief economic advisor to talk about the tapering that does not seem to have a tantrum just yet. from your perspective, how lower bar, how much bandwidth does the federal reserve have now to

taper november or hold fast? >> i think the chair has signaled that the bar to november, tapering announcement is low. and the only bar is really the september jobs report, in which he said we need a decent, but not a strong report. he said for him, the substantial progress test unemployment has been all but met. he said many people on the committee think. . we are already there i think those people are right. when there is 1.3 unfilled jobs per unemployed person. and the fed saying that the demand for labor is strong, i think we have met a substantial progress test for a couple of months now. taylor: before we get to substantial further progress, we are going to get a taper. i think what was interesting is we don't have a start date but we got interesting clues about an end date of may 2022.

if you do the math and think 6, 7, 8 months, and could be $15 billion a month. but it is the composition of that as well. what do you think about the speed and competition -- opposition of a taper? john: if they announced november, which i believe they will at the november 2 fomc meeting, they announced in november, aiming to finish around the middle of next year, and let's say it will be into, the third quarter then the arithmetic works out neatly at $15 billion a month easily as the fed has signaled. it is probably proportionately between treasurers, $10 billion per month, in mortgage backed securities of $5 billion per month. we are going into this at a faster pace of purchases the last time the fed tapered. and the chair said we would probably wind up the process

more quickly. it took a year last time. i think those numbers speak in their mad accents, that that is what we are likely to see. taylor: should it be equal, the previous taper when it was five and five? or is there a case that you should be tapering mortgage backed securities faster, given the huge strength within the housing market? john: well, i think the main thing is to get out of the bond buying business here. if you go more quickly on mortgages, the fed is buying 40 billion of mortgages per month. $80 billion net of treasuries per month. if you were going to go equally, you would say and your mortgage purchases. let's face it, the idea of treasury purchases is to hold down long-term rates.

i think the simpler it is for the public and market to understand, at this point, probably the better. romaine: i'm curious though, i understand the significance that they scale back. not necessarily scaling back the balance sheet. they are still going to be holding a lot. they may not be buying a lot as we learned with regards to jay powell and his own assets. i'm curious as to why it matters so much that as long as they are going to hold what they have, at least for the foreseeable future, why does it matter whether it is $5 million, $10 billion, with regard to the scale back the purchase themselves? john: you make a terrific point. the chairman was asked, what happens after you stop buying? what are you going to do with the massive balance sheet? he said we have not decided yet. and it is too soon. i think that is not the most helpful. i think his argument is people will be thinking about that

rather than thinking about what we do now. i do see that to some degree. but the fed never really got out of its large balance sheet the last time, allowing run-on to diminish the balance sheet. we started to talk about the balance sheet will shrink as a share of gdp. i think this is an issue the fed is going to address. the fed says it wants treasury balance sheet. that has no active plans to sell. romaine: can i make another quibbling question? can they legitimately start to raise rates without actually stringing the balance sheet? -- shrinking the balance sheet? john: yes. jen emily, even though -- legitimately, even though they say they have not intended to do this, they could raise rates while still buying new assets, because of paying interest on

excess reserves for the short-term interest rates. the fed do the site of its standing repo facility. for each counterparty, going from $80 billion to $160 billion. because the fed is already putting so much cash out there, nobody can know what to do with it all. so this is -- this process is taking too long, and i think the fed is too afraid from the experience of the last taper tantrum. even $15 billion a month, there is more than $1 trillion of that cash being redeposited at the fed through this facility. it signals that perhaps they should be going sooner and faster. caroline: you make a great point with the repo rate. the size of the liquidity, the cash sloshing around, but the federal wage or -- reserve has made clear it is not just about

financial stability and the overall inflation rate, it is about the labor market. how blunt an instrument kerry policy now at tattling the labor market and the inequalities, when we've got so much friction whether it be about covid, return to work, and the ability to get back to work if you are lacking childcare, for one example. john: and the chair did touch on some of these issues. and recognized the fed cannot target particular sectors of an appointment rate and so forth. on the other hand, there is no explanation of how the fed buying bonds and inflating asset prices helped the labor market, when the jobs are already there. i think monetary policy is an extremely blunt and ineffective instrument. tackling the issues that the chair and i would like to see tackled in the labor market in terms of opportunities for more marginalized labor groups bringing down the disparity

between minority unemployment rates and the wider unemployment rate, all of those things are things that are important societal objectives. but i just don't see how buying bonds, when they are already 1.3 jobs per unemployed job seeker, it could get people to get vaccinated, and it will be an incredibly effective instrument. taylor: buying bonds will not encourage vaccination rates. you make a very good point. you talk about buying bonds. i tried to ask a guest to this so bear with me as i attempt to ask this of you too. when you are thinking about economics, full day and what a yield curve is telling you, of course the long-term trajectory has been steepness. on days like today when you get a flatness, i'm wondering if it is sending the right signals of lower inflation, lower growth on

the long end because we are worried about it and we might act and act sooner than some people thought? john: just untangling market reaction from what the fed signaled, and really the news here was the fed -- there are more people at the fed looking to lift up rates in 2022. six months ago, they were saying 2024 or later. and the trajectory of rate increases appears to be expected to be faster. so you could say if the markets look at that, the flat is -- the curve is flat. and might well make sense. except the equity market reacted so well. it is not really the equity market reacting to expectations that rate hikes will chop up growth. i think there is something here in the markets saying, we are not really buying into what the fed is telling us. yet, i think the fed inflation

forecasts are too low and the fed may well have to raise rates, raise rates twice next year rather than what -- once next year and we will see inflation forecasts revised higher. it is a signaling problem when the chair is saying well, i would not read too much into inflation. we are already over the last five years, slightly above the target. the fed is obsessed about the inflation rate being below target. caroline: yeah. fascinating. john: i think it is a credibility question here. caroline: we don't ever doubt your credibility. worked on wall street for year, chief economic advisor, john ryding, thank you for the insight spirit plenty more still ahead. we will be discussing why economic inequality may be to blame for low rates. our guest joins us, professor of economics. this is bloomberg. ♪

caroline: today we are focusing on the fed. one of the main issues of the central bank has been addressing inequality. a lot of discussion about whether or not the federal reserve can shift the labor market. can they make it more inclusive, ensure the inequality we see between people of color not being as employed as white people? women not as much as men. can they address that? what is fascinating is we are having a conversation about whether it is inequality driving the federal reserve. may the federal reserve has to

keep rates low because of saving rates of the wealthiest. taylor: these comments are really interesting, that gap we are showing on the chart between black or hispanic unemployment and white unemployment to be zero. you don't want a gap. but there are things outside the fed's peer-reviewed that you can't control. some systemic issues, education, you name it, monetary policy alone cannot solve. powell did a nice job of saying of course you don't want that gap. there is a lot that the fed cannot really specifically address when it relates to that. romaine: this is a debate you and i and caroline could have all day. this is a debate people much modern venice have had. joining us now, princeton university professor of economics, he wrote a great book a few years back, and became -- and came into the spotlight with a great paper that examines these inequality issues. i'm curious about some of the

language we have heard out of powell, nunnally today, but over the past couple of years. the idea that they are focused on the labor market, and they are not just focused on it in an aggregate level. they are looking at the disparities between blacks and whites, men and women. i'm wondering how much of that distorts the reaction function, for good or bad, of the fed when it comes to raising rates? atif: yes, thank you for having me. the important question here is the extent to which the fed actually impacts inequality, or if it does the opposite. the extent to which the rise in inequality makes it more difficult for the fed to operate. what i want to point out is that the latter is actually quite important. to put it differently, if you look at the last few years, interest rates have been near zero. the fed has tried to raise rates

at times, if you go back a few years. but it has quickly been forced, at some level, by the economic response, to cut back rates down once again. the key question is why is that happening? the point we try to make in our paper is that there are structural forces which are more dominant in a way, that they are the ones that dominate the conversation, that in particular, the rise in inequality tends to put downward pressure on interest rates. the reason for that is quite simple once you look at the data. the reason is the very rich, but top 1% that have been getting a larger share of the pie, that fraction of the population tends to save at a significantly higher low rate than the rest of the population. and they get more of the pie, they are going to share more of it as the economy. the problem is that investment,

which typically is the way you want to absorb those savings, has not risen. the additional saving has to go somewhere else. that somewhere else has typically been in the form of borrowing by the household sector, and more recently by the government. when you have that additional level of consumer and borrowing, you have an economy which has more leverage. an economy which is a lot more leveraged, cannot sustain higher interest rates that easily. that is the core argument. caroline: the argument you make, there was a whole paper that was taken up to the media by storm. within that paper, you say it raises concerns about stagnation, asset price bubbles, which many would argue we have now, and it complicates monetary policy. how can you stimulate the savings being put to work in investment? how can we get corporate's to

invest? if we already have a government that is investing in the u.s., you are starting to see this infrastructure bill that might take shape to a huge degree. is that enough? atif: it might or might not be enough. it depends on the politics of the whole situation. if you take public investment, historically, in the u.s., but has been coming down. public investment has been going in the wrong direction from the perspective of what i was talking about. that makes the problem more severe when you have investment going down from the public sector as a share of the economy. we need to really change that dynamic. both on the supply side and on the demand side. on the supply side, that means increasing the level of competition. markets have become more concentrated. on the supply side, it means investing in infrastructure and other kinds of activities that require the public had because it is not in the private

incentive to invest in the infrastructure like broadband but the country needs in rural areas. research end of element centers that need to be built, that will require public ordination. on the demand side, we need to think of appropriately structured progressive forms of taxation. the stepup rule is one good example of that that people are legitimately talking about. romaine: how do you accomplish that in this environment? when i hear you say that, that doesn't sound like a fed that can do that on its own independently. there has to be more coordination with the federal government, with congress. i'm wondering if you anticipate something like that could be pulled off? atif: that is partly what i was trying to say earlier. we can't put this burden on the shoulders of the fed, because it is not designed to tackle these issues. . if it is inequality that to some

extent is driving the conversation on interest rates, it is really a structural problem. that has to be dealt with on the political site, by and large. the fed can help in different ways. but the core issue remains that it is a structural problem that requires legislation, that requires moving the wheels in the right direction on the critical side. i'm not a politician, and you guys know that better than i would, but i can tell you from the study of the macroeconomy that this is something that is of first order importance. i can communicate to the best -- the rest of the world that this is something we need to do as a society. it is up to the politicians to come together and make that happen. it is a first order problem, number one. and we cannot just rely on the fed. it is something we have tried to do for a while, which is leaning on the fed to figure out its problems. that is just not the way to

solve this particular issue. romaine:romaine: this is a great conversation. unfortunately, that is all the time we have. appreciate you taking time to be with us. just a really great mind up there in the world of economics. atif mian, over at princeton university, a much talked about paper released this year. we will be back in just a second. . don't go anywhere. you are watching bloomberg. ♪ you are watching bloomberg. ♪

taylor: romaine, the debate continues. in march, the fed predicted core pce would be 2.2%. 3% in june they raised it to. today, they raised it to 3.7%. romaine: but they keep saying that these price pressures are not necessarily going to persist. he made it clear that the overshoot households are not feeling it. i'm not sure we are hearing the same thing. taylor: know.

gina says you hear that, but we have heard it for so long. caroline: $1000 bonuses. nike, we are going to see how much pricing pressure is on the company. fedex yesterday. taylor: huge. one of these days i will get romaine to admit he is on my team secretly. bloomberg technology is next. this is bloomberg. ♪

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