taylor: let's look at how these equity markets performed on the day and the week. it is red across the screen, one of the worst starts to a year we've had in a few years. on the day, the dow doesn't look so bad, but the nasdaq off a 1% on the week we have had since february. all of this is because of rate hike expectations. they are climbing. we are trying to get back up there from march. they are pricing in about a 16 basis point move, 25 basis points would be a full rate hike. "what'd you miss?" starts next.

caroline: a jobless rate falling in the u.s., wages jumping higher, and a tight labor market. then labor numbers marking a historic recovery after unprecedented losses driven by the pandemic. still, inequality persists throughout the workforce. jobs that come back are not inclusive yet for many people. maybe the fed will have a conundrum trying to ask lane -- to explain. romaine: they will get a lot of questions about this. we have heard from a lot of folks on bloomberg reacting to that report. listen to what they had to say. >> it is a confusing report. >> i'm not sure it is a complete all clear. >> it suggest the economy has

normalized to a great extent. >> there is nothing in the report that will change what the fed signaled. >> all the signals are the labor market is timing. >> the job market has normalized to a great extent. >> we are moving around a full employment dynamic. >> the fed should normalize its monetary policy. >> the fed cannot escape the inflation issues. >> it is all about inflation, which is getting the fed nervous. >> the presumption is a hike. >> they will chase this thing and hike aggressively. >> three or four rate hikes the table. >> the march rate hike is definitely ago. romaine: a very confusing report, at least for those of us not economist, and those that are, the question is does it sway the fed in any direction or another? steve matthews is joining us right now to talk more about it. we want to hone in on the idea of the dual mandate. for about a year and maybe longer, we have heard from jay powell, who repeatedly talked about the idea of it more equal

economic recovery, letting the economy run a little hot to avoid some of the mistakes may be made with monetary policy coming out of previous recessions here. but of course, when we heard those comments, inflation was not 7%. i guess the question is how long can the fed stand by some of powell's previous comments with these inflationary pressures? steve: i think the fed will make the case that they are still committed to an inclusive economy and they have changed the way they are doing things. with their flexible average inflation, the idea of letting the economy run hot. i think they will claim, even as they are poised to raise interest rates and march, they will claim that is consistent with an inclusive economy. the reason for that is if you look back to where they are now, you've got the unemployed it rate at 3.9%, the fed's view is

4% on employment is consistent with full employment. that is their estimate in the summary of economic projections. and inflation obviously running very hot. the last time it lifted off when it janet yellen was chair, janet yellen, longtime democrat and very much interested in an inclusive economy, was 2015. at that point, the unemployment rate was above 5%, it was 5% in december and 5.1% the month before, the date they were looking at. it is 3.9% now. it may be lower in february. or about the same. they are already running the economy a lot tighter, the labor market a lot higher -- tighter than the last time. taylor: you are echoing comments from recruiter at black wrought

-- from rick at blackrock. this is raising a lot of questions in the next couple of months. how important is this when you thinking about inflation and the impacts you talked about on real wages, which are negative? steve: the outlook on inflation is very confused. what is happening to the labor market is pretty clear. it is hot, people are getting big wage gains, particularly at the lower end of the spectrum, and lots of jobs are unfilled. the reasons for the inflation gains are a little confusing and i think that is the thing the fed is really going to look at in terms of the pace and what they do in terms of monetary policy over the next year. they want to see how much of the inflation is driven by supply disruption issues, by covid. presumably at some point covid will return to more of a normal

state, more endemic than pandemic. it will be interesting how much of that improves the inflation outlook versus where they are right now. caroline: our tea leaves reader, thank you so much. meanwhile, a big part of the fed's new mandate is not only controlling inflation but making the recovery inclusive. earlier we spoke with bill dudley about how the fed will achieve that goal. take a listen. >> other they are successful from keeping inflation becoming a long-term problem and they can allow the labor participation rate to come up and keep these workers employed. so i think getting inflation under control will best achieve their objectives in terms of having more inclusive employment. caroline: let's dig into that and get the take from a chief

economist. diane, i am interested in your perspective. you are so fine tuned to the inequality in the labor markets. you have been so supportive of that focus coming from the federal reserve that this needs to be a more inclusive recovery. but it feels as though the federal reserve has almost tamp down on that focus despite inflation. is it right we have a more inclusive recovery if we focus on inflation like dill dudley seems to be insinuating? diane: i think he is right. the bottom line is the inflation hits the lowest end of the income strata and their already having -- they are already having a hard time inflation at the pump and grocery store. the escalating cost of rents and home owning prices will accelerate, there is a lag in terms of how that shows up in home prices versus when it shows up in the cpi. that is something, a third of

the cpi, the fed has a lot of control over and you will see them exert control over it. i think the hard situation for the fed is how do they deal with omicron at the start of the year, which could give us negative payrolls in january given the sheer number of mimicking a mandate of lockdown because of the sheer number of businesses, government offices and schools that are temporarily shut down. it is hurting those workers the most, of course, that had seen the biggest wage gains, and the jobs hit hardest by pandemic losses. romaine: there is still a lot of criticism of fed policy in past recessions, whether they tightened too fast, too soon. there seems to be more consensus this time around that the fed has to do something. i guess the question is why do they need to raise rates? i could see tapering some of the emergency stimulus and maybe doing a real runoff of the

balance sheet, but the rate hike seems to be perplexing some folks. diane: you are going from an ultra easy, accommodative monetary policy to one that is going to be really, really easy. i think the idea of rate hikes important to incorporate. yes, i was in the camp of should have tapered sooner and faster. you saw the pivot by jay powell, and he even said at his last press conference, i would have liked to pull the tapering sooner. i think that is important now. it is important to see where the fed feels they have made a mistake. they have waited it out a long time, called inflation transitory. it will be transitory one way or another. the rest of it the fed will have to chase down. what is unique about the situation is it is the first time in decades we have seen the fed be so patient that inflation

has gotten out of hand. this is such a wormhole of an economy. we went to a looking glass and there is no going back. the clocks will be running backwards when we go into a more endemic phase, as steve was pointing out, of the pandemic. there will be scars left of this pandemic on the economy, most notably the labor market. those are issues that the fed frankly only had so many tools to deal with. some of the biggest issues are things like childcare, things that are really critical to having kids in school and we are seeing studies come out in terms of what was lost and households where they were lower wage and tended to be underrepresented minorities. these are really important areas that the fed will take a close gat, but at the end of the day -- close look at, but at the end of the day, the inflation affects them more. taylor: good point. talk to us about the balance

sheet normalization. in the past we talked a lot about the way in the last cycle, believe it was between 2015 and 2017, most a two-year gap. a normalization that has been discussed that could start after the first rate hike. how are you thinking about that? diane: this is amazing, we've got the fed talking about alan she reductions at the same time they are expanding the balance sheet. the balance sheet will expand through march, right? this is extraordinary to see the fed already talking about calling it back, and that means allowing the balance sheet to run out. they are buying about 60 billion a month in mortgage-backed securities they needed to buy just to keep the balance sheet constant. the next question is whether or not they have any trade-offs between mortgage-backed securities and want to get rid of those first and allow those to run-up more rapidly, or do they do it evenly? i think they will lean toward doing it evenly since that's how

they've done the taper, even though they would rather be in a pure treasury bond portfolio. i think they will still let it run off easily. the question is how fast do let it run out. there is something else the fed is concerned about right now, knock off effects to developing economies. an extreme is turkey. but we will see other developing economies that basically, they've got a lot of debt, they have to raise rates in anticipation of us raising rates just to defend their currency. when the fed gets to the business of raising rates, i think they want to use the balance sheet in tandem with rate hikes so they don't have to do as many short-term rate hikes with perhaps an inversion of the yield curve. they don't want to do that. they'd like to do something measured and won't cause of knock off effects. and if something were to happen abroad where a foreign economy, developing economy were forced to default, we don't want that coming back on our shores.

that could come back to us rapidly. caroline: central bank to the world, of course. but as a sitting lawmaker, they want the fed to be focused at home. how much does the physical side of it become important for think -- things like rent and housing costs? how much is that administration headache as a slightly blunt instrument to tackle the fed? diane: it is a huge headache and it is real. i think one of the things we have been warning about consistently is that although much of the inflation was transitory and work out, there was a more systemic rise and things like shelter costs. when that is a third of your cpi and has a disproportionate waiting -- weighting, those are things you need to worry about, and that the fed has some control over. as part of the reason you see a huge gap. it is almost a record gap

between the consumer sentiment measures and confidence of the u.s. economy and the conference board confidence in the u.s. economy. the conference board is more sensitive to moves and unemployment. that is much higher than what we see in the sentiment index, which is much more sensitive to measures of inflation and what consumers are seeing in their grocery store and at the gas pump. the fed part of this is it doesn't have as much control over what is at the gas pump and the grocery store. at the end of the day, they take the brunt of the blame when it comes to inflation. this is a mistake the central bank doesn't want to make, having too hot of an economy for too long. taylor: really appreciate your time, diane. thank you. coming up, we will discuss how the federal reserve plans to address inequality in its own ranks. we will do that with our dartmouth professor of economics, andrew levens. this is bloomberg. ♪

romaine: we will see if this perks taylor up. we are focused on how the fed is addressing inequality. how about in its own walls? we talk about the vacancies on the fed waiting for the white house, patiently waiting for the white house to make nominations. we have heard they could potentially nominate philip jefferson on the fed board of governors, along with sarah bloom raskin, for the top you latoya post. taylor, -- for the top fed post. taylor, as a lot of folks are

pointing out, this is diversity in thought, something we haven't had a lot of in the past. taylor: we are also focused on what we can see, but you've also pointed out diversity in thought, and even powell in the last for years, what does the new unemployment rate look like, all inclusive unemployment? those are things we are trying to talk about in their own ranks as well. get some more insight and bring in andrew, dartmouth professor, formally a special advisor to the fed on policy strategy and communication. let's talk about the federal reserve itself to start. we are hearing a lot of names floated around for some of these new positions and we've had a lot of time to think and debate and discuss them and we are waiting for their nominations from the president. what do you make of the new names floating around? andrew: first of all, the key vacancy that has not been named is vice chair for supervision.

people refer to that person as the top watchdog. we are seeing -- overseeing the banking system, the fed has a crucial role making sure the banking system is stable and we don't have another crisis. raskin has impeccable qualifications. she was the chief regulator for the state of maryland and then on the reserve board, and then the treasury secretary. now she is a professor at duke. you can't think of someone more qualified than raskin to serve in this position. caroline: raskin is someone focused very much on the environment among dutch environmental side -- on the environmental side, in terms of climate change, the impact and what we need from the u.s. economy to ensure it can st and that movement. how does the central bank

deliver that as a message as well, the need for diversity of thought and the need for an inclusive labor force? it has done a good job of signaling so far by chair powell but it is a tight rope you have to walk, we are looking at inflation but also the environment and an inclusive labor force. andrew: i just want to say that lisa cook and phil jefferson are phenomenal. i guess we will see again what the white house finally decides, but those would be to great choices of people to bring onto the federal reserve board. i will say, the fed will have a tough year or two ahead of it, very challenging. inflation close to 7%. the unemployment report today, not just about on them and and payrolls, but a crucial fact in the report today is nominal wage growth was running at 7% over

the last six months and heading upward. that is because they are trying to keep pace with the cost of living. that wage price dynamic is at play now. even if we get an easing of supply chain pressures, the likelihood is inflation will stay high and the fed needs to explain clearly to the public and the markets as well as to congress. i think having raskin and jefferson along with chair powell and vice chair would be helpful. romaine: i have a broader question about economics in general and the way you view the world through your research. we talk a lot about diversity of thought and i remember when mary daly was elevated to be a bank president. there was a lot of talk about her background, basically a high school dropout and got a wealth

of personal experience to what was ultimately her own professional experience as well as her academic experience. that shaped her research and studying the labor market and she has been very vocal as san francisco fed president to talk about these issues from that perspective. is that necessary as economists when you're are supposed to be data driven? andrew: i think it is absolutely critical. just as an example, i think in retrospect, the fed itself acknowledges they probably started tightening too quickly in 2015. they were mostly looking at the unemployment rate, which they were thinking at the time that 5% might be at, as low as it could go. it turned out that unemployment went down to 4% and below without triggering an inflation crisis. another key factor in 2015 was labor force expectation was still very low. a lot of people had given up looking for work. over the last five years prior

to the pandemic, a lot of people came back into the workforce. we have the same issues today. you look at the black labor force participation, the hispanic labor force participation for prime age working adults, and across the demographic spectrum but especially these groups. romaine: i wish we had more time, we would love to have you on for a longer conversation about this. andrew levin, at dartmouth professor of economics. don't go away, we will have our final thoughts. this is bloomberg. ♪ bloomberg. ♪

caroline: it has been a week dominated by thoughts about what the federal reserve will do, and next week will be dominated by who the federal reserve will be made above, and how focused they are on diversity. romaine: the hearing on tuesday,

and thursday will be more consequential than people realize. i think the questions of what we hear from them will be important. bloomberg technology is next. this is bloomberg. ♪

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♪ >> from the heart of where innovation, money and power collide, in silicon valley and beyond, this is "bloomberg technology" with emily chang. ♪ ♪ emily: i am emily chang in san francisco, and this is "bloomberg technology." coming up, time for caution? mark mahaney tells us which way the roller coaster is heading. the u.s. supreme