jonathan: from new york city, bloomberg real yield starts right now. ♪ coming up, and inflation climbing to a 30-year high. consumer sentiment dropping to a 10-year low. we begin with the big issue, hotter for longer. >> rates are going up, prices are going up. >> seems like inflation will be here tuesday -- to stay. >> everybody is worried about

it. >> the central banks are stuck on hold, they are buying bonds. they will wait until the middle of next year until the dust settles. >> inflation is higher than they ever expected. >> is this going to change the fed's course in terms of taper? no. >> you have got to respect the probability that inflation will remain high and will persist for much longer than people expected. jonathan: joining us now is to better our joppa, and colin robertson. i want to start with mohamed el-erian who you heard through that opening mix of sound. failure to act promptly would turn the fed's characterization from one of the worst inflation calls in decades to a big policy mistake with widespread and

necessary damage. one of the worst inflation calls in decades. do you agree? subadra: it is hard to know. the counterfactual is what we are concerned about. next year, this time, if it turns out inflation is hotter and the fed has not acted sooner, it will look like a policy mistake. over the next three to six months, if inflation remains as high as it is right now, then we will be looking back saying the fed should have ended taper this year and hiked rates early next year. that is the risk. this current trajectory that the fed has laid out, inflation has to be transitory. if not, there will be problems down the road. jonathan: i want to pick up on that timeline in a moment. colin, i want you to respond to

that statement by mohamed. do you agree with that? colin: i actually do not agree with that. one thing to start with is humility. all of us trying to come out of this pandemic, knowing exactly what the environment will look like after that is hard on everyone. ultimately i agree with the fed's transitory view. the worst call on inflation in decades. maybe if we were still this aggressive with inflation prince well into the second quarter of next year, i might have a different answer for you, but i think there is still plenty of time that will prove the fed more right. it is just too fast to judgment call as being that poor. jonathan: how much time do they need to see the data that

vindicates their view? bob: i think they are already behind. it is increasingly clear they are behind. the recognition of substantial further progress should have happened a while ago. the emergency policy settings that were put in place post-covid are increasingly incongruent with reality on the ground. core inflation is gathering momentum and breadth. it is a function of policy settings that are disproportionately accommodated relative to the reality on the ground, so dial them back to pre-covid settings. this is the second time in four years the fed has gotten caught in a stale narrative. the last time was in 2018.

we should be mentally prepared for a pivot, if jay powell is reappointed chair, the accumulated evidence on the ground is that the fed is about to pivot in the next couple of months. jonathan: what does that pivot look like? bob: an accelerated taper. taper is not really doing anything at this time, is not tightening financial conditions, because it is occurring alongside substantial issuance in coupons. the decline in coupon issuance is actually a little greater than the current taper schedule. accelerated taper, put q2 on the radar for a potential rate hike it in fact conditions continue to improve and get on with recalibration back toward pre-covid levels.

it's important it is not a function of responding to inflation, rather a recalibration of policy from emergency settings put in place following covid and are no longer necessary. jonathan: subadra, i want to that. q2 on the table, do you agree with that one? subadra: we will get indication of that as early as the december meeting. that will be the most important meeting of the year because of the summary of economic projections, they will tell us if they believe inflation will be higher next year, and also if that will subsequently lead to lower growth. if there needs to be more dots for next year for hikes -- right now, the fed is evenly split. that will likely change in the december meeting when they start showing their hand toward hiking

at least once and then we would have to see if they are willing to hike more than once in 2022. we will get a lot of the information at the december meeting. i agree with bob, they should be moving toward a much faster taper, should be positioning for rate hikes, if necessary. jonathan: december 15 is that fed meeting. forecast will shift, how much i don't know, but some think they need to big-time. colin robertson, your reaction. colin: if we were going to say that the taper would quicken, my view would be that two or two and a half are not nearly enough. i think there are repercussions with the fed pivoting at this point to lower the taper, start rate increases. it would be comfortable to think that it could be systematic and

just a couple of hikes that wouldn't stress the market but i think the opposite would happen. to bob's point, yes, that that, when they finished hiking in december 2018, i didn't think they had any vision that they would start using rates in 2019, so they can pivot. ultimately, the case that bob laid out, actually points to the fed be more cautious, even with everything happening in the last year, versus not. their biggest mistake over the last five years was tightening too far, too fast. jonathan: let's talk about how you push it through this bond market. subadra, is the case still therefore higher yields through the rest of the curve? subadra: i think so. i think there is definitely the case to be made for at least

modestly higher yields from here on. the answer to that will depend on how much we will revise our growth forecast for next year based on higher inflation for this year. even within the context, if we are expecting higher inflation, growth in the context of 3.5%, we should be gradually repricing toward higher yield. the hope is, when that happens, you will not see higher nominal yields or real yields at the same time, not just higher inflation expectations with lower real yield. jonathan: bob miller, jumping. -- jump in. bob: i think rates go modestly higher. if we are right about a rising risk of a pivot -- and it's important to note, this view is conditional on jerome powell being reappointed. if he is not, the probability of

a pivot goes down substantially. if reappointed, like 20, they will recognize their narrative is stale, and there has been more than sufficient improvement in the areas that monetary policy matters the most and is impactful. belly rates, 25, 30, higher, maybe it is a parallel shift but mostly a flattening. i don't have a big problem with the long end implied terminal rate. maybe he is a little low but not demonstrably low. it is really just getting off zero and getting back to a more normal policy-setting which is still an extraordinarily accommodative vetting. real rates short-term and long-term will still be quite negative. jonathan: colin robertson, final word? colin: probably will not surprise anyone here, but i

think they will move to 1.75. if the 10-year moves to 2%, that would be a gift. to your question on where rates fall, i do agree with bob and subadra, that rates, little higher, but i think ultimately they would come back down. if we get to 1.5% terminal fund rate, the fact that we could have a flat yield curve to me is possible. jonathan: we will continue the conversation. bob mentioning a few times to the next fed chair may be. up next, the auction block. that conversation is around the corner. from new york, this is bloomberg. ♪

jonathan: live from new york

city, i'm jonathan ferro. this is bloomberg real yield. let's start with the auction block in europe. corporate issuance this week with china amassing big orders. at least 20 to companies selling u.s. investment debt this week, raising $25 billion. a junk bond market remaining open, selling $14 billion, pushing volume two annual record. markets awaiting president biden's announcement on the next fed chair. some say he deserves another term. >> i think you did a good job, managed through the pandemic. one thing that is not talk enough is that he tried to hike rates, but he backed off. he has some experience with the attempt to normalize. not sure while you bring in anyone new. jonathan: still with us are bob

miller, colin robertson, subadra rajappa. how consequential do you think this decision could be? colin: if it is not chair powell being reported, it is more likely to be lael brainard or someone that is perhaps more dovish than jay powell. don't forget, chair powell is not hawkish. this group at the fed introduced the concept of broad-based and inclusive full employment, maximum employment definition a couple years ago under a republican president. it is a mistake to consider this group anything but very dovish. incrementally more dovish, i think it contributes to a further risk on reflation trade with equities and commodities doing well, breakevens moving even higher.

it will contribute to further access in some areas of the economy that are currently threatened. household wealth as a percentage of gdp is up almost 100% in a two-year period. it is an epic rise in household wealth to gdp. it's a function of the dramatic improvement in equity valuations and real estate valuations, housing valuations. that is directly attributable to the extraordinarily accommodative financial conditions, real interest rates out the curve specifically. regardless of who was in charge, sometime over the next few months, if there is not some consideration about financial stability issues given the epic rise and household net worth as a percentage of nominal gdp. jonathan: i'm trying to decide

how tradable this event is. whether it is perceived differences between the people we are talking about or actual differences. how much daylight is there between fed chair babel and governor lael brainard? subadra: i actually disagree with bob. i don't think the ship would make that much of a difference. i have had a long career and i don't remember a hawkish fed president in my career. you have had hawkish regional fed presidents but not a chair. the fed, as a committee, is very careful to retain continuity, so they will not rush in and completely change policy, either to the hawkish or dovish side. the biggest change they have made over the last decade is moving away from the 2% inflation target to an average inflation target.

i don't see them moving away from that. to me, who chairs the committee is not nearly as important as how they execute policy. i agree with bob in the sense that financial conditions are very easy. whoever comes in will have to tighten rates. but lael brainard has done the job, she has been through rate hike cycles of the governor -- as the governor of the fed, so she would become, managing through the cycle. the reason to keep powell as chair is to avoid near-term volatility. if he stays, assures continuity for the broader market leadership. jonathan: as a market participant, would that inject unwarranted volatility to the mix? if people ask you for your opinion, if the white house reached out to market participants and asked what they would do, what would you say to them? subadra: there is room for

near-term volatility. there is already volatility in the market, whether you look at the rates market, commodities market, fx market. having a new chair i think will add to that volatility if anything. over the longer run, it shouldn't matter. jonathan: colin, your take? colin: it would last about a day, the uplift in the markets due to a change to brainard. i think i agree with peter who you had on tape. it makes a lot of sense for powell to be reappointed. i think the only thing that would get in the way for me thinking that lael brainard was a more likely candidate is if it didn't have a number of the positions on the committee to fill, which they can do with females or diverse candidates, if the chair was the only one to fill, it would have been brainard because of where we are in society.

jonathan: final word on the market. in this environment, take as much risk as you can. that is what you want to do. given everything we have talked about through the last 20 minutes, why do you want to grab as much risk as you can? colin: i'm not talking about a mild recession, but i am talking about if there was some significant pressure and stress in the markets, that the fed would go back to the playbook they used at the start of the pandemic, rescue the markets. when the fed came into support the markets, it was a big story. we talked about the fact that the fed came in. where investors are missing how this narrative ended, when the fed took themselves out of the market, there was no reaction whatsoever. if i'm a member of the fit now and we see significant stress in the market, go back to that playbook.

to me, it is the risk on, you could have a period of volatility, as subadra mentioned, but knowing that the fed still has the investor's back, there is no reason to push against that. jonathan: how durable is the fed put in this environment? in the last cycle, the fed had the capacity to step back every time they sounded to hawkish. do they have that capacity anymore? bob: i think they will always have the capacity, even in a modestly elevated inflation regime. at the end of the day, their safety net matters to a meaningful shock. i don't think they respond to a 10 or 15% decline in equity prices that is due to honestly slowing growth with very moderate inflation, or profit

margin pressures. as long as the economy is reasonably strong and it is incredibly resilient now. think about household balance sheets, corporate balance sheets. incredibly resilient, and it will be for the next year or two. their job will be to step in if there is an exogenous risk shock, much like covid was, but perhaps in a different form. jonathan: it is hard to reconcile this. consumer sentiment at a decades low. we have to work a lot out over the next 12 months. colin robertson, subadra rajappa, bob miller. coming up, the week ahead, another busy week of fed speak. this is bloomberg. ♪

jonathan: i'm jonathan ferro. this is bloomberg real yield.

over the next week, the united states and china holding a virtual summit between president biden and president xi on monday. u.s. retail sales on monday. jobless claims on thursday. another round of fed speak through the week. rounding out the week with fed vice chairman richard clarida. for this market, an important man. it doesn't get discussed enough, what happens to him? let's get to the rapidfire around. cpi next year, 2 handle, 3, 4 or higher? subadra: 4. colin: 3. bob:3. jonathan: one height, no hikes,

one, or more? colin: no hikes. bob: two or more. subadra: at least one. jonathan: does chairman powell get a second term, yes or no? bob: i think so. subadra: yes. colin: yes. jonathan: thank you. from new york city, that does it for us. this is bloomberg. ♪

mark: i'm mark crumpton with bloomberg first word news. the white house says president biden and xi jinping hold a virtual summit on day.

both sides have been looking to dial back tensions after a rough start to the u.s. china relationship mr. biden took office. talks, after tension between the countries have been building over issues including taiwan and restrictions on sales of u.s. technology to china. president biden has tapped robert caleb to run the u.s. food and drug administration. the move puts caleb back at the agency's home in the midst of the still raging pandemic. senator joe manchin immediately opposed the pick over his ties to the pharmaceutical industry. in germany, the four coronavirus wave is hitting with full force and there is no sign a record infections easing anytime soon. daily cases searched fast 50,000 this week or the first time. some hospitals are already overwhelmed with patients. officials say germany needs to ramp up its vaccination campaign. a number of