♪ >> to be buying into the fed's inflation dismissal. >> you really haven't seen growth accelerated in the second half of the year. >> if you have wage growth and productivity growth as well, it doesn't need to be inflationary. >> you see demand pretty much across the board. the issue is can that be fulfilled. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. jonathan: a bit of risk aversion this wednesday. good morning. this is "bloomberg surveillance ," live on tv and radio. alongside tom keene and lisa abramowicz, i'm jonathan ferro. this wednesday, futures -53, down on the s&p 1.2 percent. on the nasdaq, down 1.4%. tom: it is moving out there. you go to the currency dynamics as well.

what about the thundering silence of the weak dollar crew? it is stunning how that has stopped. jonathan: strong dollar this morning. you by the greenback, you by the u.s. dollar -- you buy the greenback, you buy the u.s. dollar. some indicators showing the tension. it folds into washington as well. our guest coming up has really pushed against weak dollar for months and months. mark mccormack looks like a genius. jonathan: is it fair to say the epicenter of all of this is energy? lisa: natural gas in particular. when you take a look at the united kingdom, prices absolutely surging. but there's a bigger story here, and that is the transition of the economy at a time of a perfect storm. how many times have we talked about supply chain disruptions, a pandemic, and a transition to greener energy? jonathan: what happened to

september? lisa: it turned up to -- it turned into october. do people expect we will all be able to travel again? i think those hopes are fading. jonathan: that is just an idea of the conversation. equity futures are negative. the s&p 500 lighter by about 1.2%. the nasdaq is down 200, -1.4%. in the bond market, given what has taken place in the equity market, they are not big moves. 1.5432%. tom: they are not big moves, but the vector is in the right direction for correlation. jonathan: it is persistent. yields have been moving higher off of early august, and threatening to go higher from here. in the fx market, talk a little bit about that dollar strength. euro-dollar -0.5%. lisa: to become, the stories go

very much together. the idea that you have a risk off mood, bonds are not a haven. what is the threshold for the fed to start tapering monthly bond purchases? that threshold has gotten a lot lower. 8:15 am, we get the adp unemployment change. this is not necessarily that indicative. what is the threshold for the federal reserve? a lot of people are saying the bar has been lowered. they want to stop buying bonds, even if the economy is showing some strains. at 11:00, president biden hosting some banks to talk about the debt ceiling. expect a lot of discussion about the potential risks of defaulting. does this matter to anyone? the t-bill yields have been rising. however, still not indicating the kind of distress we saw back in 2011.

today is the second day of the bloomberg invest conference. we've got a host of speakers. the interesting thing to me has been what they have been saying about china, the world's second-biggest economy slowing down, increasing regulatory risk. they do not want to own it. don fitzpatrick of soros came out and said, "we are not putting money into china right now." she is not alone. people are looking for diversification, but not at the risk of regulatory uncertainty to this degree. jonathan: really looking forward to that. a classic risk off set up in g10 looks like this. outperforming, the yen and the swissie. underperforming, the commodity currencies, the likes of the aussie get we need to talk about foreign exchange. your backed up this morning, he stronger dollar. arc mccormick -- mark mccormick of td securities joins us now.

start there. unpack that for me. mark: there's a lot of narratives around real rates, central banks, stagflation. , reflation all of these dynamics related to this transition period we are going through as well. currencies are expecting mean reversion. they are trading off of mean reversion based strategies. these things that are really technical, but they are not really sexy macro stories. it is not really about the fed, about what is going on in some of these local dynamics. if you are trading fx, a core strategy that focuses on mean reversion plus growth, plus trade, plus the risk aversion dynamics we see has really done great through this stagflation narrative through the summer. i think that is a big part of it , thinking about what is driving fx in terms of performance and what is rewarding currencies

versus what is being discussed as a narrative. tom: if there is an interest rate dynamic and you go over to a flow analysis, and you have nailed this over the last year with dollar resilience, are we near big figure jump conditions in the major pairs? mark: we are, but we are also not. this is where the performance comes in. do these currencies affect the risk premium, or are they moving the fundamentals? when you think about euro, it is screaming very cheap right now, but the flows could push us may be to .14%, 1.15%. we have not seen it in the relationship to other backward drivers, so the flow dynamics are important. but if you look at the week this in the yen, it is calibrated quite well with the weakness we have seen, or the relationship

we have across yield curves and inflation dynamics. so dollar-yen moving higher is a bit of a more sticky trade relative to what we have seen in euro in the very short run. lisa: how damaging is the strong dollar for emerging market currencies, considering this is exactly what they want to see, a higher inflationary premium in the rates markets? jonathan: across -- tom: -- mark: across the board, it is challenging. you can see a lot of it is managed. a lot of it is coming through back in g10, probably running through gold prices as well. i do think a big part of the relationship with em is em as a whole is going to underperform as markets are repricing the fed , dealing with stagflation, but there are winners on a relative basis in em.

you think about central banks that are hiking, growth stories that are generally ok. the miners and exporters of energy will win through this. a couple currencies stand out, mainly the russian ruble, which checks a lot of these boxes that look really appealing. maybe not at these levels, and as we are seeing risk aversion come through, you don't want to be dipping your toes into specific em, but that is the one that looks most attractive, along with some other eastern european currencies. jonathan: dollar strength this morning, and you identify the number one single sustainable answer to allow dollar strength to persist into new year? mark: unfortunately i don't think it is going to be persistent. i think it is going to be very wobbly. we are dealing with stagflation, but there are elements that have

not seen a significant downgrade to global growth outlook. we are also generally more dovish on the outlook for the fed. we are looking for a rate hike in 2023. there's an element here that we get this extreme move in the dollar, we reprice the fed, but it is probably going to ebb little bit into later this year and 2022. i think the dollar probably softens a little bit in 2022, but we've got to get reengaged for what will be the start of the tightening cycle in 2023. we've got to respect the ranges and some of these major currencies, even though it is a little bit higher for the dollar. jonathan: appreciate that. just some insight there into a broader relief in this fx market. we haven't seen the capitulation i don't think just yet on the dxy. tom: that is really well said. what is the set up now for a cathartic capitulation?

we are nowhere near there. mark mccormick was lonely a year ago talking about dollar resilience. i miss them all. you know, we miss them all. jonathan: they sent steve major off to hong kong. what did they do with ben laidler? tom: we ask a lot of questions. jonathan: we can talk about hsbc another time. tom: laidler was on fire this morning. jonathan: let's talk about bill dudley, formerly of the new york fed, pushing back against the patients of this federal reserve. tom: if you are on global wall street come on radio and television, just stop what you are doing when we speak to mr. deadly. it is going to be an important conversation about the paper that everyone is speaking about. jonathan: that comes down to inflation expectations. lisa: the idea of fighting the battle of the old one, where it

was a problem to get inflation up. what counts as inflation, and when is it good inflation versus bad inflation? this is such a unique moment, the idea that if you get persistent commodity inflation, it could slow growth and have a negative impact on that cycle of inflation. tom: -- jonathan: tom, framed this for a -- frame this for us. do they matter or not? tom: i didn't get it done, i don't get it now. dudley will answer. lisa: you are not alone. jonathan: that is the tees for later. futures down 50 on the s&p. yields higher by a couple of basis points. from new york come on radio, on tv, this is bloomberg. ♪ ritika: with the first word

news, i'm ritika gupta. president biden will meet with the leaders of the biggest banks on avoiding a default. jamie dimon and brian moynihan are amongst those who will attend. the white house is pressuring senate republican leader mitch mcconnell to back off his refusal to help democrats raise the debt ceiling. it is a strategy shift by the white house. president biden's team is trying to broker a deal to scale back his ambitious economic agenda. and buyers -- advisors are weighing against inflation and tax hikes. the administration is trying to drum up support in trips to political backgrounds. fed reserve chairman jerome powell has gained support that could help him win a second term to lead the central bank. more than half of republicans on the senate banking committee are backing him. his most visible opponent is

democratic senator elizabeth warren. business is the u.k. are facing a historic surge in inflationary pressures. one of the country's leading business lobbies warns that more manufacturers than ever are ready to raise prices as a result. the findings come from the british chamber of commerce. they may be unwelcome at the bank of england. deutsche bank's asset management unit dws is starting any review into claims by a whistleblower over so-called greenwashing. investigators are investigating over allegations that social governance figures were overblown. global news 24 hours a day, on air and on bloomberg quicktake, powered by more than 2700 journalists and analysts in more than 120 countries. i'm ritika gupta. this is bloomberg. ♪

>> right now markets are pricing in early aggressive timing that really isn't consistent with what central banks are trying to achieve or get you've got to protect the household. i think that's got to be the focus for the next three to six months. jonathan: geoff yu of bny mellon, the senior strategist. from new york city this morning, good morning. alongside tom keene and lisa abramowicz, i'm jonathan ferro. your equity market -48, down 50 on the s&p, 1.1%. just off the lows on the nasdaq, -1.2%. bond yields are little bit higher, up two basis points. this is just persistent. yields higher. in the commodity market, similar story. softer today on crude, but we have been inching higher towards $80. there's your dollar strength against the euro. euro-dollar, $1.1541, -0.5%. tom: you've got linear moves in fixed income, but you do not

have linear moves in commodities. these have acceleration higher as well. there's been a lot of good work on this over the weekend. i think bloomberg asia has done very good work summing up what is going on. i know an lng conference is going on right now in japan, and that is all the talk. this is not just about europe. it is about prices higher in asia. jonathan: the broader fear right now is that higher prices will hurt growth, and every time people start to see higher prices somewhere, anywhere, energy in crude, net -- crude, not gas, that worry starts to get a little more fuel. tom: there is the deadline and the debt thing, the infrastructure and that. emily wilkins out of michigan, who knows a gallon of gas really works in kalamazoo. emily wilkins joins us, bloomberg government reporter. i love the peace in "the washington post" three months

ago where he talks about the politics of a rising gallon of gas. the republicans will say it is the president's fault gas is higher. how do the democrats respond? emily: there are a lot of things that when you are president, you get blamed for, whether or not they are in your control. there's a whole list we could go through here that the president really only has a minimal say in. i think that is why you saw president biden last night in michigan, a battleground district in a battleground state, say we really need to focus on the priorities. that was what biden's message was, and that is what democrats are telling themselves. don't focus on the top line number. focus on things like health care, child care, elder care that they know has support not only among democrats, but also republican and independent voters. tom: in the senate, this is a differential. this goes back generations.

we can't raise the gas tax. jon ferro is appalled at how expensive gas is in america. is this still a third rail in washington if we get four dollars a gallon? emily: yes. we are in the process of passing an infrastructure bill, and they were debating for how long over how to raise money for to pay for this bill, and a gas tax was mentioned, but everyone was immediately like, that is not going to work. they are not going to touch it. jonathan: in the u.k., about 1.35 pounds. that's a lit -- that's a liter. takes you to about seven. early-morning maths, is that good for you? tom: my head hurts. [laughter] lisa: i've got to say, there was

a story about president biden paring back his economic agenda. i don't understand where he is paring it back. is it the headline figure, or is it something more substantial we see under the surface? emily: i don't think we know at this point where democrats are going to pare back, but they are having conversations about that. when president biden had his meeting with a number of democratic lawmakers, that was the topic. when he spoke with progressive lawmakers on monday, that was the topic. president biden is saying when i came to you last friday and said we need to get this thing down to $2.2 trillion or less, i meant it. there's a lot of discussion about whether to have some means testing, whether instead of having all americans on medicare be eligible for dental and vision and hearing, maybe limit those to those who make a certain income and under. also some discussions about maybe not funding some programs for five years or even less. things that can still allow

democrats to say we were able to give you x, just not as much initially wanted to. lisa: in the meantime, we have this heated fed debate picking up. senator warren yesterday being pretty vociferous about her opposition to reconfirming jay powell as fed. president biden's press secretary said biden does have confidence in powell at this time. what are you hearing in terms of what that means, how far that confidence will go in terms of going against the progressive wing in getting jay powell back in the seat for another term? emily: should biden decide that he wants to nominate jay powell for another term, usually when it comes to these biden nominees, we think it is 50 senate democrats, all 50 democrats need to be on board, and if one of them isn't, that is a problem. but that is not the case with powell. he has a lot of rapport from republicans, and a number of

republicans have said they will support his nomination. that means president biden can technically afford to lose senators like senator warren and perhaps a handful of other progressive senators because he will make up those votes with republicans. also remember that in terms of nominees that biden needs to nominate to the fed, powell is not the only one up. there are other positions open and other opportunities for biden to nominate someone at the progressive wing will really like. jonathan: emily, thank you. lisa, what did we make of senator warren in the past 24 hours on the senate floor? a bit fast and loose with a couple of words. corruption, conflating trades with rebalancing. you wonder whether that is disingenuous. lisa: i will just say, without getting myself into too much trouble, congress has a history of also having members who have had trades going out for certain bills have been announced or

things like that. this is a pretty pervasive issue in terms of how you go about targeting it. if you want to come up with a systematic way, great. if you want to present evidence, great. what we are dealing with at the federal reserve is a perception issue, not necessarily an impropriety issue as far as any information we have learned so far. jonathan: given how big the fed's role is in the markets now, does this prevent anyone from holding? i think it is a really important question. tom: where my opinion is on this doesn't matter. lisa voiced what we have heard going back to the founding fathers. lisa: i just struggle with, do you necessarily have a blind trust? are there other solutions to allow people who have assets to still serve on the federal reserve board, or have we gotten so emotional about this debate that we are removed from the actuality of the issue and just want to feel angry? jonathan: fed bashing is a full-time business that pays really well right now. some people do that full-time.

it is very emotional, let's be clear about that. this federal reserve and the conversation around it is incredibly emotional. 1.55% on tens. on radio, on tv, this is bloomberg. ♪

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>> right now markets are pricing in early, aggressive timing that really is inconsistent with what central banks are trying to achieve. you've got to predict the household, whether through fiscal or lack of rate hiking. i think that has to be the focus for the next three to six months. jonathan: geoff yu there a bny mellon. equity futures this morning negative a little more than 1% on the s&p. the good news is we are off the lows. the bad news is we are still negative. the nasdaq down by 1.28%. the russell off by 1.26%. let's start with natural gas prices in the u.k. the chart parabolic, vertical. gas prices rallying really aggressively. not just the u.k. come about across the board in europe. we were off by almost 40% a little bit earlier.

we are off those highs -- we were up by almost 40% a little bit earlier. we are off those highs. you take the real yield, subtract the real yield from the inflation linked curve, and you get the implied inflation rate, the market-based implied inflation rate. it looks like this right now, explosive. 13 your highs on breakevens and the u.k. the energy story spills over to inflation expectations. nominal yields shift higher as well. this is the risk aversion story at the moment. yields are up two, three basis points on the nominal 10 year yield in the u.s. this is the story at the moment. the energy story bleeds into expectations of higher inflation . that drags up yields in america as well. treasury will start to bleed a little but higher. it fuels this fear at the moment , and i am not saying it is a reality at the moment, but the fear of the moment the higher

prices start to hit growth. a very different backdrop this time around compared to q1. tom: there's an ambiguity there. i would say it is how far and how sustained that vertical move goes. there's a huge belief this morning that that vertical move will pull back. jonathan: yields on tens, 1.5484%. let's get you some stock movers this morning. that's the cross set price action. here are the movers. here's romaine bostick. romaine: good morning. you had a great line about higher prices and how that impacts growth. that has been the story for the equity market itself. you talk about apple, facebook, nvidia all lower in the premarket. the nasdaq lifted by about 1.4%. the nasdaq 100 now down in the premarket. you've got apple and facebook still in correction territory, as is nvidia.

also right around oversold conditions, so the question really does become is a growth story in a rising rate environment. what is a growth story if inflationary pressures proved to be a little bit more consistent than some folks priced in? one of the bright spots in the premarket belongs to palantir technologies, with a 100 when he $3 million u.s. army contract -- with a 123 million dollar u.s. army contract. american airlines, catherine o'brien at goldman downgrading american airlines to sell. you talked about the september quarter and into 2022 because of higher prices for fuel. tom: the markdowns for earnings are coming down to the zero bound. romaine: this is coming up a lot here. people are trying to stay

optimistic for earnings season, but when you look at the cost pressures these companies have felt in the inability to pass these on to consumers. tom: why do you have manchester united up there? romaine: it is a small company, i think they play football. tom: why aren't the tots up there? jonathan: just for us. romaine: just for you. tom: are the tots publicly traded? jonathan: i don't know, tom. if they are, i would have expected you to have a share. tom: the triple leveraged all tots fund. and you very much. saving us right now, this is a really important conversation, david sowerby joins us in new york. thrilled he could be with us. what this comes down to is your belief to not go to cash. i have never known you to go to cash. why should i not go to cash this morning? david: because cash is trash.

zero return. after inflation, it is negative. most of the time which markets go up 2/3 of the time. i think in the near term, you're still going to see companies' free cash flow margins be very impressive over the next 12 months. tom: what we can say is you work off the income statement. explain the dynamics now between the zeitgeist of margin erosion and the reality in our ok economy. you make it revenue support. david: free margins are 12.5% today. we are likely to hear companies in the upcoming earnings season talk about inflation and labor market shortages. those will be the two items i watch for the most. nevertheless, amid that, i think they will still be talking about revenue growth and margin expansion over the next 12 months. lisa: how do you remain nimble

at a time when bonds and stocks are selling often tandem? david: bond market is not going to be the place to make money, with all respect to my bond colleagues. the inflation-adjusted yield is negative. the prospects over the next two to three years look sobering, dismal. i think in that environment, equities are the place to be, given the valuations on a free cash flow in an environment where stocks, i believe, are still your best hedge in an environment where inflation is going to become more problematic , but not problematic enough for stocks until it is sustainable above 4% to 4.5% for inflation. lisa: i know you focus more on small and mid-cap stocks. however, we are seeing correction territory from recent highs, and we are looking at the nasdaq down more than 8%. would you start buying here, or

do you still say this is not where the value is? david: in the mutual fund i comanage, i am overweight tech, but it is companies like broadcom or accenture or cisco systems to go with apple. they are not priced for sainthood. they are priced for reasonable cash flow and revenue growth. i think you can still own technology, even though we have seen some weakness here. it is just what evaluation you are paying for believable cash flow. tom: what do people on the left and right coast not get about manufacturing service sector growth in middle america? david: there has been a manufacturing renaissance for five years now and the midwest. it is in detroit. i have hardly ever wanted to own an auto stock, but i own gm today. tom: is it all the ev stuff, or something different? lisa: it is part -- david: it is

part ev. they are betty allocators of capital -- they are better allocators of capital in the used to be. general motors institute, that is her heritage. tom: lisa, it is the chicago law of engineering. lisa: i love how you just troll all of us every day. thank you so much, tom keene. we were talking about the industrial stocks in the united states. talked about big tech. i want to talk about banks. this is something jon has been asking about for a while, and i think it is a really important question. we see yield steepening today. the consumer will still continue to spend, and yet tanks are selling off today more than even tech companies. how optimistic can you be on banks at a time when higher prices will potentially crimp consumer activity? david: i think the consumer balance sheet is in very good shape. for every dollar in income they

have generated, they have only taken on $.50 worth of debt. you can take a bag -- a regional bank like citizens financial, but then parent up with a credit card play that is definitely based on the consumer and pretty good credit trends. tom: you and i grew up thinking our homework, listening to kmox in st. louis. can the cardinals do it tonight against the dodgers? david: i will bet on the dodgers, but my heart always routes for them. we will root for st. louis. tom: there's a whole social fabric there that goes back to world war ii. jonathan: sorry it is lost on me, tom. i appreciate it. tom: newcastle is playing the tots this weekend. jonathan: i was distracted by this. thank you. tom: you're going to ignore what we just talked about. jonathan: i am because i am

looking at this. take a look at natural gas in the u.k. and what it is doing at the moment intraday. tom, round. absolute round-trip. this was up almost 40% a little bit earlier, and now it is up about 2%. what do i know? absolutely nothing. tom: prime minister johnson? jonathan: what is behind that move, to go from plus 39% deposit of 2%, and rolling over like that? no idea. lisa: people's bank of u.k.? jonathan: doing what, lisa? lisa: i don't know, trying to prop up the market or suppress it? tom: with all the news we've got coming into the bloomberg terminal, aggregation is second to none. when we don't know what we are talking about, we are the first to mention it. i agree, we have no clue. jonathan: the jitters behind higher prices, what they do to growth to see equities lower, just remark will. that was the epicenter of the story for people waking up in

london earlier this morning, and it is totally rolling over now. tom: i'm sorry, it hasn't moved bitcoin, $51,000. jonathan: i don't know if it was the primary driver behind the equity market either, but still off their lows. lisa: it shows how little we know about a lot of these moves because even when the price was moving as rapidly as it did, people were saying we don't understand why the price of gas is rising to this degree, and now we don't understand why it is coming back. honestly, a little bit of uncertainty. jonathan: we need to decouple energy prices from the greenfield transition. tom: i heard that in japan this morning. it is a carbon neutral world. how do hydrocarbons just? jonathan: from new york city this morning, good morning. on radio, on tv -- tom: cardinals. jonathan:jonathan: ok. [laughter] bill dudley. can you say that, tom? tom: dudley.

jonathan: the former new york fed president, next. this is bloomberg. ritika: with the first word news, i'm ritika gupta. political brinksmanship on capitol hill is bringing the u.s. closer to a catastrophic fault. , kratz and republicans must decide in the next day or two how far to take their deadlock over the debt limit. senate republicans planed to block another democratic effort to raise the limit today. former u.n. ambassador nikki haley is setting the tone for a possible presidential race. in a speech at the reagan library in california, she urged republicans to return to the reagan era roots. at the same time, she defended former president trump and promised to consult with him on the 2024 race. energy prices in europe have extended their blistering rally. the regionwide supply crunch showed no signs of easing, and that has prompted the european union to promise swift action to protect the economy. dutch and u.k. natural gas futures have jumped 60% in

st a few days. in hong kong, chief executive carrie lam has outlined plans to develop a border with china into a major metropolitan area. more than 9000 homes would be built to ease a housing crisis. lam wants to develop the area into an information technology hub. on monday, snape saw a 23% boost in time spent on its android app, compared with the same day the prior week. telegram and signal also reported a big surge in usage. global news 24 hours a day, on air and on bloomberg quicktake, powered by more than 2700 journalists and analysts in more than 120 countries. i'm ritika gupta. this is bloomberg. ♪

sen. warren: i can't support jay powell for riemann nomination -- for renomination.

my view is he ends his term, we put somebody else in his place, and i think the fed will be better off and our economy will be safer. jonathan: senator warren on the federal reserve in the past when he four hours. good morning -- the past 24 hours. good morning. on the s&p, we are -1.2%. on the nasdaq, we are -1.3%. yields higher to 1.5450%. all of the attention on nat gas prices in europe. a full round-trip from plus 39% in the u.k. to about plus 4%, 5%. tom: i'm looking at four-day natural gas off the commodity. this is the american view. it has pulled back, maybe not like what you showed earlier in europe, but we come back to where we were earlier in the afternoon yesterday. it is a pullback. jonathan: we are now negative. tom: right now, for global wall street, we are going to go geek on you, and we want you to keep

up. robert lucas invented my concept of expectations. the giant from chicago was one of my first interviews when i joined bloomberg. always controversial within economics. william dudley of berkeley, goma and saks, and the former fed president for new york -- goldman sachs, and the former fed president for new york making it clear that this is a federal reserve system fighting the last war. let us go to the economist dashiell hammett, from the controversial paper. this is the great detective author of another time and place. "nobody thinks clearly, no matter what they pretend. that is why people hang on so tight to their beliefs and opinions because compared to the haphazard way they've arrived at it, even the goofiest opinion seems wonderfully clear, sane, and self-evident." that is jeremy rudd's paper on expectations. is our belief in inflation expectations, our belief in

gaming the future through what people believe the future will believe, is it over? william: i think the key question is how do households respond to inflation. does that affect their behavior, or are the threshold effects where, in other words, they only react once inflation reaches a certain level where it starts to change how they work? i think jeremy raises some interesting questions about whether our model of inflation is generated correct or not. jonathan: the influence of your peace this morning i think has been at the center of your call for much of this year. think the fed is going to be too late, and they are going to have to move faster than people expect. what is the argument that underpins that call? william: i think the issue is that the fed learns some lessons from the last crisis, but don't really apply it to the current recovery. the lessons from the last crisis was that inflation, we had

trouble pushing inflation back up to 2%. they thought full employment was at a higher level of the employment rate then it turned out to be. so they revise their monetary policy from work and said we will work really hard to push inflation up and push the unemployment rate down to a level past full implement. that is great for that last cycle, boat about this cycle? we already have inflation above the fed target, and we have a lot of uncertainty about how much slack there is in the labor market. think the risk is that they are fighting the last war. the problem isn't inflation too low, the problem is inflation is too high. we have all these questions about how much slack we actually have in the u.s. labor market. jonathan: the win question is -- the when question is always hard, but it is a question we have to ask. what will lead them to have that re-think? william: i think the interesting question they have in their current set of projections is the unemployment rate going low,

their view of what his maximum sustainable employment in 2022 and staying there through 22 any for. they have in their forecast inflation falling over that period, and the fed not even getting back to a neutral policy-setting by the end of 2024. if monetary policy is this easy for this long in this tight of a labor market, they are going to have more of an inflation consequence than what they have written down in their current set of projections. lisa: if you are right, why have we not see more material wage pressure, wage increases that actually exceed the pace of consumer inflation more dramatically? william: i think it is still early days. . we have just emerged from the pandemic over the last year. i think it is too soon to say what is going to happen to wages. the employment cost index is the most reliable indicator on wages. that only comes up once a quarter. we are looking backwards at sort of old information. jonathan: you've made the

argument they have to get back to neutral more quickly. let's talk about the speed limit. how high can they go with the fed funds rate in an economy like this one? william: i think they can go a lot faster than what they have penciled in. people have reacted to the last fomc meeting as the fed being really hawkish, but if you look, if it takes three years to get to a median federal funds rate of 1.8%, that is not a very fast rate of tightening. a comparison would be the 2004-2000 six episode, where the fed raised at seven consecutive meetings. i don't think it is that extreme, but it could be something a lot more than what they have priced in. jonathan: i am just trying to understand whether this economy with this much debt can take those kind of moves. william: i think they will not get all the way to 5% because the economy will start to react to that burden, but it seems to me it is reasonable to think the

federal reserve will have to get to a tight monetary policy setting before the end of 2024. jonathan: bill, great conversation, and fantastic piece. out this morning on bloomberg.com and the bloomberg terminal. bill dudley, bloomberg opinion columnist and senior advisor to bloomberg economics. just trying to squeeze in some questions to get as much out of it as we can. his argument pretty clear. they are going to be late, they are going to move quickly. tom: jeremy rudd is the real deal. he is off princeton, of the research of the federal reserve system, and the paper basically rips up 40 years of belief of how expectations are informed on inflation. for dudley, not so much to push against that, but to question its belief in the cycle, is important. jonathan: one heck of a debate right now, and it continues. this is "bloomberg surveillance ."

with equity futures down 48, we are -1.1%. nasdaq futures down by 1.24%. yields higher to 1.5432%. euro-dollar, $1.1537, negative zero .5%. on radio, on tv, this is bloomberg. ♪

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♪ >> we are cautious in the markets. we have been expecting a downturn. >> the market seems to be buying into the fed's inflation dismissal rhetoric. >> people seem to mean that -- seem to think that transitory means it will only last for a short while. >> there's elements here that we are dealing with stagflation. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. tom: good morning, everyone. it is an interesting day, a different day than anything we have seen.