>> we are clearly being a fed that is going to move faster in terms of rate hikes. >> rate hikes don't -- >> the fed has to do a better job telling us what they are thinking, how they are thinking. >> the aim for the fed is to tighten financial conditions. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. jonathan: what a crazy week last week was, kicking off a brand-new trading week from new york city. good morning. this is "bloomberg surveillance ," live on tv and radio. alongside tom keene and lisa abramowicz, i'm jonathan ferro. your equity market unchanged on the s&p. anything but last week on that -- on the nasdaq. tom: you mentioned a 1.80 10 year yield.

is it grinding yet? maybe it is going to be a grinding wee, up -- grinding week, up, up, up. jonathan: you heard priya misra of td moments ago, and she says this federal reserve, they need to tighten financial conditions. is that what they need to do? tom: this goes off the goldman sachs research note making a splash this morning, and ms. m -- and ms. misra over at td. the facts have changed. they are pulling forward. jonathan: we've pulled forward the conversation about balance sheet reduction. it is not just goldman. lisa: your point, we are not to

seeing a broad-based reduction in risk. we are seeing pockets fallout. but there is not this broad-based revulsion at all things risk. how much does this give the fed a green light to go ahead? jonathan: this week, cpi, retail sales, confirmations earrings, earnings start. the sb 500 much lighter last week, slightly later this morning, -0.3%. yields are higher marginally by have a basis point. on tens, one point 7656% -- 1.7656%. lisa: former new york fed president bill dudley joining us

, so how much has the market woken up to the reality and how much more waking up doesn't need to do when you look at the 10 year yield, the highest going back to january 2020? at 10:00 we get home so inventories for the month of november. how much does this give a hint at what we can expect from retail sales that we get later this week? this really dovetails into consumer sentiment from the university of michigan, which we also get which has been trending lower. how much are people getting concerned about how much inflation has been going up? today we have a slew of wonderful conversations. jonathan: goldman sachs making all the headlines this morning for the call. matthew lose eddie -- here's the

important point on qt. our preliminary calc elation suggest that while runoff would be three junta billion dollars to $400 billion, it would be equal to roughly two hikes in total. this is important. jim caron of morgan stanley discussed this with me. just the interplay between the equivalents of balance sheet reduction and the rate hikes and the dance between the two, how they complement each other. do you expect fewer right -- fewer rate hikes or the same? tom: we are making it up as we go. you know what i am going to do? i'm going to read strategists this morning. one of oppenheimer looks at all the fed soup and says maintain right sized expectations. everybody has got to get their brain off of up to 20% a year and get to something that is

more managed given the turmoil we see in our monetary policy. jonathan: forecasting 5330 on the s&p 500. futures down a little more than 0.1%. joining us now is matt diczok, cio and fixed income strategist for merrill and bank of america. can you walk me through how you're thinking about that right now? matthew: i like tom's comment about original economics, making it up as we go. acquittal months ago we had -- a couple of months ago we had no rate hikes, a taper ending in june. now we are with a hike in march, tapering ending by march, four hikes next year, already talking about qt. the important thing here is it is important that the fed has pivoted and changed direction,

and the market is handling that quite low. in terms of qt, the minutes talk about them discussing it, but it does little too early to worry about qt at this point. focus on the rate hike in march, and then they are going to see at that point what is absolutely necessary. we are still a good six way, that we are still a good six months away from that -- we are still a good six months away from that. they don't have to actually quantitatively tighten. it did not work out very well in 2018, 2019, and they very quickly changed pace. lisa: if they do not follow through on some sort of quantitative tightening, do you expect the yield curve to flatten to an uncomfortable place, especially as they raise rates? matthew: i am not selling or

will not get qt. i think they will get qt, but it is a decision that does not need to be made now. the correlation between quantitative easing and rates is not that clear. a lot of times when the fed stops on tate of using, rates don't go up. they actually go down because they are not getting accommodation as necessary. so that is not always going to be the case that rates go down, not up. but it is very possible, so they will look to the yield curve not as an outcome to what they are doing, but as a consideration. we went from 85 points to the low 30's. if it keeps going, keep an eye on that. but notice what's happened.

40 is steep enough for now. tom: at bank of america private bank, as with every private bank, you must be overwhelmed with our listeners and viewers who say i did not participate last year like i should have. what do you say to someone who feels like they missed out on this great bull market, whether year one, year two, or your three? matthew: that is always a way to get into trouble, looking in the rearview mirror and feeling like you missed out, or looking at the guy next to you and thinking he made more money than you. so we are not too worried about any past gains and look forward. lisa made a great comment at the start of the section here discussing that there were pockets in equity markets and pockets in risk assets that are coming down. this is part of our guidance here, that we want those individuals that missed out to participate, but be balanced and

diversified, and in particular, make sure you have exposure to value stocks, make sure you have exposure to cyclical stocks. the higher duration equities, tech is an example, where earnings are far out in the future, higher earnings can affect those a lot more. so you really want to be diversified here. we think we are early in that stage again. we are not saying to be totally overweight value. we are seeing this is an environment where you want to be diversified across your equities and across your fixed income. we are still more bullish on equities to expectations. but be diversified, make sure you have cyclical and value exposure. don't go too much in any direction, but certainly don't be as overweight the growthy, high duration equities that have performed well. do not chase last year's performance. jonathan: and if you live next door to tom keene, don't feel bad.

just imagine that, living next door to someone that makes 30% last year. you get jealous, don't you? you would know if you live next your to tom. lisa: in triple leveraged all-cash, although he does make a mean negroni. honestly, i think there's a really interesting consensus being formed here. what is compelling to me is this rotation into value seems to be catching speed, but people think that midyear is going to shift back to growth, that people are going to get more concerned about the trajectory of the economy, and people will pick up some of those tech stocks on the cheap. it seems like there's a shift towards some sort of growing consensus on that. jonathan: that was the call from lori calvasina on this program. tom: i will just say watch what corporations do. the profits are so great this time around, a lot of these people on their conference calls are going to be apologizing for their success.

granted, the view forward is key. how do they recalibrate given the omicron uncertainty? citigroup just out was an enthusiastic note on delta airlines. imagine the 30 days the delta team have had. jonathan: the same thing with the european union names, particularly leptons a in the left -- particularly lufthansa in the last couple of weeks. tom: earnings season to me is more important right now because the parlor game of the fed is so original. we don't understand how original this is in the struggle that market economists are having. jonathan: tom keene, lisa abramowicz, and jonathan ferro. your equity market -0.2%. per our audience worldwide, heard on radio, seen on tv, this is bloomberg. ♪ leigh-ann: with the first word

news, i'm leigh-ann gerrans. the biden administration and u.s. allies impose import restrictions on russia if vladimir putin sees as more of ukraine. they are discussing limits on sensitive technology and electronics. in geneva, senior american and rational officials -- and russian officials will begin talks about easing tensions later today. -- did spread inland before chinese officials detected it. that brings the very end the doorstep of the capital less than a month before the winter limits begin. officials have said that 4 million residents are not to leave the town unless it is essential. goldman sachs is forecasting the federal reserve will probably raise interest rates four times this year. the research note so says they will start balance sheet runoff in july, if not earlier. officials signaled they are preparing to move quicker than last time they tightened monetary policies. tennis star and a buck took of its may be able to stay in australia and go for a record

21st grand slam victory. a judge has quashed the cancellation of his visa and ordered his release from detention in a hotel. judges argue he was granted net extension -- granted an exemption to covid rules after he tested positive last month. for the first three quarters of 2021, samsung held a narrow lead in sales. the final numbers for the full year will be available in late january, but it seems that intel has dropped into second place. --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. this is bloomberg. ♪

pres. biden: i want to be clear, i am confident the federal reserve will act to achieve

their dual goals of full employment and stable prices and make sure the price increases do not become entrenched over the long term with the independence they need. jonathan: president joe biden. your equity market down another 100 points on the nasdaq 100, down 0.7%. keep an eye on that. a move lower last week of 4.5%. we are down about 15 points, 0.3%. in the bond market, briefly through 1.80%, back down to 1.77%. i have no doubt if you are on social media, you saw one of two things over the weekend. adverts, commercials for sports betting, and this reference to this game wordle. i have no idea what wordle is. lisa, what his wordle?

lisa: it is a game where you guess five letters and it tells you whether you are correct or not. i find it incredibly entertaining if you have covid or if you are in the emergency room with a child who broke a bone. wordle really is wonderful. it is a website. [laughter] jonathan: tom, have you seen the mentions to that game over the weekend? every time i opened twitter, that is all that was there. tom: i was so upset, and it is confirmed this morning, thank you to the general and who confirmed what i observed. coffee at mcdonald's skyrockets to $0.87. jonathan: i love the transition there, tom. we are talking inflation with emily wilkins. senior. i don't get wordle. emily, do you get wordle?

emily: i absolutely get wordle. how else what i post an annoying great of squares on my twitter? tom: emily wilkins joined us, excellent on wordle, and also what the biden administration will do one inflation. a cover article this morning about inflation. all this is is a blame game. there is no other way to put it. he's got an economist at treasury who is pretty competent. what is secretary yellen telling him about the blame game of going after apple or name the corporation because it is their fault? emily: the biden administration came out initially saying the reason we are seeing this inflation, it is just temporary, it is due to covid, we are going to go back down. you have seen them back off of those talking points after you have seen month after month of higher inflation numbers. you have really seen republicans step up and start aggressively attacking democrats on this particular issue because they

know it is impacting average americans in their daily life. a lot of democrats on capitol hill are holding their breath at this point. they know that if inflation continues, that is going to make a difficult midterm for democrats that much worse, and that is probably going to lead to big gains for wilkins -- for republicans in the midterms. tom: i look at the inflation story. if there is a blame game, don't we have to turn our attention to the fact that we had a massive fiscal expansion given a pandemic of our lifetime? emily: that is part of the thing congress is looking at. that is part of the reason why we haven't seen any progress on president biden's social spending and tax plan, the so-called build back better. one of joe manchin's main concerns is for the inflation component of it and with that could do to the markets. that is part of the reason we have not seen it go forward at

this point. there is also some discussion, there's been talk of another piece of stimulus, specifically for omicron. but if you look at the price tag , we talked about trillions, we talked about hundreds of billions. this one, "the washington post" has reported, would be much smaller than that. part of that is coming as congress is becoming more and more wary of potentially adding more funding into the market, and inflation is becoming a bigger and bigger concern with in washington. lisa: there has been a common belief that no government wants to see at hawkish federal reserve, not only are we talking more stimulus, more spending, but the confirmation hearings this week of fed chair jay powell, as well as governor brainard, how much will we see a shift in that belief, and that this government would like to see perhaps a more hawkish federal reserve?

emily: they want to know that they are going to start seeing better employment numbers. these are the things they will be grilled on in front of lawmakers next week. i think everyone is trying to figure out a way to really get out and get past this pandemic. that has been president biden's stated goal from the beginning, but you have seen delta and omicron really for that off-track, so at this point there's a question of what can the fed do. obviously this is a global issue. there's many countries that are being impacted by these problems , but it is a big question of what, if any, power the fed has. you have seen president biden really call in the fed to start addressing these issues. lisa: do we have any update on when we will get the other nominations for the open seat that we have coming up on the fed? emily: we have started to see names tossed around, so that is a good sign that we are going to see something concrete coming up soon. biden is making several

different speeches this week. he is going to be heading down to atlanta tomorrow. that is going to be mostly focused on voting rights. on thursday he is going to be talking about the government response of covid. maybe that could be a time for him to begin discussing his other nominees to the fed board, but it is certainly something he needs to start singing about. we are in 20 put into right now, ending up -- in 2022 right now, and a number of these deadlines are coming up. jonathan: when these people post to twitter, how do i know if they are good or not? emily: you want the bottom row. if the bottom row is all green, it means they got it. so someone who got the puzzle right in three rows did a better job than someone who got the puzzle right in five. tom: here we go. the letter r is in the wrong spot. ok? the letter f is in the correct spot. the letter k is not in the word. how are we doing, folks? jonathan: did you just play the

game, tom? tom: i am trying. [laughter] this is between us and them and others. jonathan: let's see how long this fad lasts. i will try it later. emily wilkins down in d.c. lisa: which trend, wordle or tom playing wordle while we are on air talking about the below backdrop in washington, d.c.? jonathan: if you want a serious note on the on lemon story, i think the 3% handle change the game for a lot of folks, including citi. citi saying report 9% removes the last rationale for keeping rates low. we expect the first hike in march. that changed the game for a lot of people. tom: we will get out another 30 days and get the jobs report. look where claims are. it is the most elegant chart out there. you are dead on. when the facts change, they change. that is what everybody is doing in the fed game. jonathan: the transitions on

this show are beautiful, aren't they? down 0.3%. yields higher by half a basis point. briefly through 1.80% on tens. tom, when you have done this, you've got to post the squares to twitter. tom: can you do this with something stronger than tang?

♪ jonathan: no bounce back on the nasdaq 100 this morning. good morning to you all. the nasdaq 100 down another 100, -0.7%. take more weight of last week's rally. on the s&p 500, down about 0.3%. the story your to date has been that rotation. look at the performance gap opening up. let's cherry pick a little bit here, but do with me. the nasdaq 100 year-to-date over the last week plus, down four point 5%. the s&p 500 banks up almost 10%. that is the performance gap that has already opened up early in 2022. tom: it also has to do with what we will see on the earnings

season. there's a real zeitgeist since this week and that the banks are going to show bang up earnings as well, so there's the gap for what, one week? kristen: it depends -- jonathan: it depends on this bond market. a key feature of this has been that big move higher on 10-year gilts, up 25 basis points. curve on stands also steeper by 12. the whole curve comes up. the forecast of higher interest rates, yields up briefly through 1.80%. the conversation now has got to shift towards, if you are not already there, the interplay between balance sheet reduction and interest rate hikes. if you expect an earlier move on balance sheet reduction, do you trim the expectations you have for interest rate hikes? goldman this year says they look for four hikes this year. everyone coming every quarter, and they expect the balance sheet reduction as well. i thing it is going to be interesting to see how they

forecast the interplay through 2022 and 2023. tom: we have discussed this. there's a lot of movable parts. i would suggest the movable parts of romaine's world is a lot more focused on what you do on revenues, what you do on margins. jonathan: right now, tens 1.76 56%. with your single names this morning, here's romaine. romaine: let's take a look at a big deal in the space out there. take two interactive, a traditional mobile video game, seeking to buy zynga, a mobile videogame maker. we should point out this is $9.86 a share, what they are offering for this company right now. this is about a 6% premium to what we were offering friday. the ceo of zynga is going to join take two interactive leader mobile gaming business. this is a big deal because

take-two has had a lot of trouble building out that mobile business. he has done a lot of work there. before that he ran ea s mobile business. -- ea's mobile business. this is a cash and stock deal. about 2/3 will be stock. that is why you're seeing take-two down 8%. take a look at the other videogame companies out there. flip up the board and let's get to a cabrillo other names here. viacomcbs -- a couple of other names here. viacomcbs, discovery both getting upgrades. discovery at bank of america, viacom at deutsche bank. both took -- both to buy from good streaming numbers. tom: thank you so much. greatly appreciate that this morning. right now as we recalibrate after a which she was -- after a

tumultuous week, kristin bitterly joins us. you need to write language at the right time. to me, it is super intense. in your research note you talk about a super intense moment, the super intense week we had last week. how do we find calm in these markets? kristen: finding calm in the one thing we can look to which is actually earnings. everything that is going on, whether it is the substantial movement in rates, fear of inflation, the one thing that will come back that is the record high profitability. so it is not just about what happens in q4, but more importantly, it is the forward-looking guidance we will also get from those management teams that have previously held back. but if you are able to withstand some of the pricing pressure, you are able to withstand some of the supply chain disruptions, those are the quality companies that we want to be invested in

and that we have been investing in, and that is really our positioning for 2022. tom: i know you had a research note on delta shock. what do you glean from your cell side trips going into conference calls? they are to go into the forecast expeditions forward. what do you glean from citigroup's cell side right now that helps you? kristen: i think the biggest thing is this not a devout about growth versus value. a lot of people discussing the start to this year and the big rotations we have seen into banks, into energy, it feels like deja vu a little bit in 22 anyone. i go back to this quality companies. we are not trying to make a decision about whether to be invested in growth or value. we want to be invested in quality. so the interesting thing i think the first week has really

provided us with is when you look at this text selloff, i think the one thing that makes a little bit different than what we saw throughout the entirety of 2021, because we did see that delineation between winners and losers, what we saw was this text selloff is the length of it has really accelerated. out of the nasdaq 100, you have 30 gates and go stocks down 20% or more from their 52 week highs. 65 have dropped more than 10%. that breadth is going to create some opportunities, particularly in some of the subsectors we like, so i thing this is not an either or, but leading into those strong companies and qualities. lisa: you are started to see some of those strong quality names bottom out when it comes to selloffs? kristen: i am not sure we have seen them entirely bottom out. i think this is the best way in terms of how our investors are currently looking at this and

how we take advantage of some of the volatility there. the fed's hilty of the rate increase, the volatility in terms of anticipation of earnings. one way to build those positions is quality companies that you like, that you want to hold for those sectors that i mentioned like cybersecurity, right now you can get a double digit yield to buy into that at a 5%, 10% pullback from these levels. so ironically, this volatility around tack is creating an opportunity for us. lisa: a lot of people would agree with you, but the timing here, i think there's a lot of disagreement. some people have been saying, particularly lori calvasina of rbc, that there is more selloff to come, and you will see perhaps even those growth names take another hit before they become attractive later in the year. why do you think now is a good time to get in resident waiting until people shake out all of these new rate hiking views? kristen: i think the thing is that there is going to be volatility. the challenge that investors

have is really delineating what their timeframe is, short-term, medium-term, long-term. i think individual investors have that benefit of trying to take the long-term view which is why you can have that separation between the quality, as well as some of those long-term unstoppable trends that will really indoor, but i think the genesis of volatility, i'm going to bring this back to the rates market because i thing this is important, what the fed is doing. everyone is talking about rate hikes and saying we are anticipating that. we anticipate it a pullback in purchases, but the balance sheet runoff getting acceleration, i think we are going to see some topping markets for the next couple of months when it comes to rates because you don't have the fed being that consistent, particularly in areas like mortgage backed securities. don't have that kind of bid every day for that market which is going to rely on private markets, and i think we are going to see some balancing out over the next couple of months.

jonathan: wonderful as always. kristin bitterly of citi five at bank. it is difficult to fully internalize the fed shift here without a clear view, some clarity on what the interplay between the balance sheet reduction in rate hikes will actually look like once they get going. lisa: and the fact that the fed does not have as clear of a sense of the effect of a balance sheet on markets -- balance sheet reduction on markets, they have been hesitant to bring this into play as long as they have, simply because of that uncertainty that fed policy has. it does not have that much precedent. jonathan: do you see the story on friday on citi? i will read the quote for you. "office workers who don't comply by january 14 will be placed on unpaid leave, and their last day of employment will come at the end of the month," this according to a message to staff seen by bloomberg. the message very simple. no jab, no job. that is the message coming from

citi on wall street and beyond. tom: noted over the weekend. i don't have any strong opinion on this, or will we see a follow on to this. i have to believe you're going to. there was a really important essay in the financial times this weekend, his work from home working. she went to actual academic research, and the productivity of work from home maybe is not there. work from hotel, that worked out ok. jonathan: i think it is going to differ from bank to bank, from leader to leader. what we have seen is a continuous trend, with every single wave, the wave passes, step back in. let's get back to work. he remember last year when it felt what the endemic was really upon us in new york city? it was the end of may, going into summer. it was the feeling that we will see you after labor day. september, everybody needs to get back into the office. if this plays out the way a lot of people think it will play out

which is that omicron fades back into spring, let's get to may again, do you think it will wait until labor day to get back into the office? i imagine they come out all guns blazing, let's go, your summer is going to be in the office. lisa: you have seen banks taking out new leases and property in new york city. it is not that the office is dead. i thing what you're going to see, and this is what i keep hearing, days where everybody has to come in, and other days that there is more flux ability. tom: you can't -- more flux ability. tom: you can't play wordle work from home. jonathan: you can't? i think that's exact a what has been happening. [laughter] tom keene, lisa abramowicz, and jon ferro. futures down 0.5% on the s&p. we are now down 1% and the nasdaq 100, -0.97% lower after last week's loss of 4.5%. stay focused on that one. from new york, this is bloomberg.

leigh-ann: with the first word news, i'm leigh-ann gerrans. inflation in the u.s. has probably hit the fastest pace since for decades. the consumer price index comes out on wednesday and is forecast to rise 7% through the year through december. that helps explain a shift in the federal reserve approach to monetary policy, along with more consumer anxiety about the economy. in kazakhstan, security forces backed by russian led troops are restoring control after crushing demonstrations. the government says almost 6000 people have been detained. according to state tv, wondered 64 people were killed. the real number is thought to be far higher. tennis star novak djokovic has won a court battle to stay in australia and play the open. a judge reinstated his visa, which was canceled after his arrival last week because officials decided he's not be exempt from vaccination requirements. the judge ordered that djokovic

should be released from detention. still, australia's government is threatening to cancel his visa for a second time. congresswoman alexandria alexandria ocasio-cortez has tested positive for the coronavirus. the new york democrat is fully vaccinated and has had a booster shot. her office says she is experiencing symptoms and is recovering at home. a big takeover today in the bito game industry. take two interactive has agreed to buy zynga in a cash and stock deal valued at about $12.7 billion. that represents a 64% premium in zynga's closing price on thursday. 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 leigh-ann gerrans. this is bloomberg. ♪ ♪ >> i think they could go much higher.

they got equal to what we've seen with inflation at the end of the day because people have been buying treasuries, they only see 2% or 3%, but inflation is 7%, it percent, 9%, so at the end of the day, those have to go up. jonathan: mark mobius there. good morning to you all. futures down 22 on the is and become a down 0.5%. as the move on the nasdaq, negative almost one full percentage point there. yields no higher by a couple of basis points. i said mark mobius was one side of the trade. there is another one, pgim. mike collins telling me now for him it is a buy. there's a limit to how far the fed will take it. he's comfortable looking at the 10 year and the 30 year right now where it is. tom: it is going to be interesting to see. we are going to stop the show right now. we welcome all of you on radio and tv to may be the first great

discussion of the year. william dudley is not the normal economist. yes, his work at goldman sachs out of berkeley, but far more his tenure at the new york federal reserve, he has been very overt in writing pretty much twice monthly for bloomberg opinion, and this week he issues his most scathing essay on where our central bank is. what is it like to write with that language of a remarkable and surreal fed economics? are you getting criticism from inside the fed? william: i am sure it doesn't make people they're happy, but the reality is i've got to call it like i see it. the federal reserve has a very benign forecast relative to what is happening on inflation. if you look at inflation forecasts published at the december fomc meeting. they have inflation melting away to 2.1% in 2024 even though they don't take monetary policy to a

typesetting. the federal funds rate is below what they think is neutral. how does the inflation magically disappear? that is the question i want to raise. jonathan: alan -- tom: alan greenspan talked about the measurement, the idea of a graduation, a step-by-step approach. alan blinder in an essay into thousand five said the greenspan standard is suspect. are we going back to arthur burns and the slope where we lose order point measures and start to see real jumps? william: i think they are going to go fairly slow at first because i think the inflation pressures we are seeing right now are going to subside as we go through the first half of the year. the real new information is the tightness of the labor market and the fact that the tightness of the labor market is resulting in higher wages, wages above what is consistent with 2% inflation. so i think even if the initial

impulse of inflation turns out to be transitory, they now have a problem because the labor market is sufficiently tight and wages are going to continue to accelerate. lisa: in your piece, you reiterate your call for the potential ingrate for the fed funds figure. i am struck by the fact that you include the idea of an end rate for inflation at 2.5% to 3%, which is actually a commonplace suggestion. what happens to risk markets if the fed funds rate gets to 3% or 4%? do this economy can sustain that? william: i think that is a fundamental question. in 2006, the economy sustained the fed taking the federal funds rate from 1% to 5.25%. in 2016 to 2019, the fed did not do so well. so i think that is the fundamental question. how do markets react? i think right now, this idea that the fed has a small amount

of tightening that is going to cause markets to go down precipitously, i don't think that is the most likely outcome. lisa: if you think inflation subsiding result in what could be a crippling fed funds rate, are you saying that we need an inflation rate below 2.5% to have an economy that is sustainable over the next decade? william: i don't think a 3% to 4% federal funds rate is crippling in any way. it is unusually high relative to the last 10 years, pretty low to the last 30 or 40 years. i think the economy can do just fine with a federal funds rate in that range. i think with the markets are really mispricing is that the fed will have to move to a tight monetary policy setting at some point. a lot more rate hikes are being priced in in 2022, but the terminal federal funds rate the market is expecting is only around 2% or so. jonathan: to summarize the

message, you think for inflation to come lower, the fed needs to engineer tighter financial conditions. from your standpoint, where using that tightness begins? where do you think it is, 1.5%? where does it start restrictive to where we say the fed is now tightening? william: i think when the market starts to price and more tightening than what they have priced in at this point. when the fed prices in what they've done today, i think the market us to go farther than the fed anticipates for the markets to react. -- i think the fed has to go farther than the markets to react. jonathan: the original that happens, the fed doesn't back off. it's not the old playbook. william: the fed has to do his

job at the end of the day. if you try to differ the fight against inflation, it is not trying to be a nice guy. we saw that mistake in the early 1970's. i think the federal reserve do its job. it is slow to realize the consequent as of a tight labor market which they have mentioned. tom: i want to go back to goldman sachs. there's not a moment to lose. that is what i hear in your essay this morning. it is like, ok, let's get it going. the taylor rule is described as stunning. it is something you and i never would have envisioned. which moves quicker, the taylor rule coming down with all of its moving parts, or does the fed move up at a greater speed. william: i don't think the taylor rule is really that relevant right now. chair powell talks about the importance of financial

conditions, and that is a key issue. the financial conditions are extremely accommodative. to slow the economy down, the fed needs to make financial conditions less accommodative. raise short-term rates more and faster than what markets expect. jonathan: how does balance sheet reduction play into this from your standpoint? william: there seems to be a growing sentiment that the balance sheet reduction is going to happen sooner than last time in the level of interest rates. i find that a little bit surprising given that the fed have also said that they want the federal funds rate to be the primary tool of monetary policy. if you want the federal funds rate to be the primary tool of monetary policy, you need to get the federal funds rate up so it can actually react to adverse shocks in the economy so you can push it back down. i think the case for being alone more patient with the balance sheet is pretty strong, but it certainly looks like, judging

from fed official commentary, that they are going to go faster in terms of what level of interest rates they have to get to before they normalize the balance sheets. lisa: what is your sense of how much they should raise rates this year? william: i think they should go faster than what is priced into the market. it will depend a bit on how the market evolves. my best guess is they need to do at least 45 rate hikes this year. it would not strike me at all if we get into an every meeting kind of cycle at some point. jonathan: what went wrong for this federal reserve? william: number one, the way the operation said they would not even begin to lift off until they satisfy the goals of inflation at 2%, expected to be above 2% in the future, and at full employment, so the starting point for monetary policy liftoff is the economy is already overheating. i think they were wrong about

the labor market. i think they were surprised about how fast the labor market tightened. i think they were surprised about inflation. transitory hasn't played out very well. i think a lot of inflation pressures are transitory, but that is lasting longer for a lot higher than they anticipated. finally, i than they were a little due concerned about worrying about a taper tantrum. i think they were too gentle in terms of their communication because they were worried that was going to provoke a selloff in markets. the problems right now is that the market is not telling them seriously enough. jonathan: you have been wonderful about this for more than six month. bill dudley a bloomberg opinion in the former president of the new york fed. this goes quite needed together with what mohamed el-erian wrote , that despite recent moves, the fed is still lacking on the ground.

it is probable that policy will further undermine markets' notion of a fed put. that is essentially what i heard from bill dudley. lisa: the idea is that the fed does not want to stop a tantrum and the market has not had a tantrum yet. two of the market has not had a tantrum, do they need to spur it by getting a little more concerned in order to actually tight monetary conditions? to me, this is really the wildcard. jonathan: do want to engineer that to be the objective. that was the message we just got from the former new york fed president. tom: i think they are making it up as a co-author also historic fiscal expansion, original expansion off of a natural disaster. i'm going to cut them some slack, but with that said, bill dudley brings up some important points. i just took the taylor rule as seen on the bloomberg and plugged in adam posen and olivier blanchard's inflation at the peterson institute. i will be honest, the taylor

rule a proximate and barely moves. it is stunning, how far extended it is. lisa: i am still trying to get my head around what a 3% to 4% fed rate would mean. we heard from bill dudley that he think the market can absolutely handle that. just think about how it rejiggered junk bond yields currently at 4%. just inc. about the nasdaq valuation. how much can markets get ahead of something that seems completely anachronistic to today's market? jonathan: isn't that what is fascinating about today's market? do you can have the likes of bill dudley saying we need to get to 3% to do anything? the likes of mike collins saying the market is going to back up big time. lisa: i think this year is fascinating. i am actually really interested to see how things develop, and very smart people making very good arguments. either could be right. jonathan: your market shaping up

as follows. the s&p down 0.6%. there is the move on the nasdaq 100, down 1.75%, adding to the losses of last week of about 4.5%. more still to come. from new york city, a beautiful one as always. heard on radio, seen on tv, this is bloomberg. ♪ is bloomberg. ♪

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♪ >> the bond market seems to be pricing in a hawkish fed, but the equity market does not seem to be doing that. >> i think the fed is trying to inject risk into the market they will respond. >> we do not have the experience for markets to calmly go through a tightening cycle. >> overall policy remains accommodating. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. tom: good morning, everyone. a simulcast from our studiosn